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** Science  is  nothing  but  trained  and  organised 
Common  Sense,  differing  from  the  latter  only  as 
a  Veteran  may  from  a  raw  recruit,  and  its  Methods 
differ  from  those  of  Common  Sense,  only  as  the 
guardsman's  cut  and  thrust  differ  from  the  Manner 
in  which  a  Savage  Wields  his  Club," 

HUXLEY. 


COMMENTARY 

ON   THE 

SCIENCE  OF  ORGANIZATION 

AND 

BUSINESS  DEVELOPMENT 


BY 

ROBERT  J.   FRANK,   LL  B. 

OF  THE   CHICAGO   BAR 


A  Practical  Treatise  on  the  Promotion,  Org-anization, 

Reorg-anization  and    Management  of 

Business  Corporations 


WITH 


SPECIAL  REFERENCE   TO  APPROVED   PLANS  ,AND   PRO- 
CEDURE FOR  THE  FINANCING  OF  MODERN 
BUSINESS      ENTERPRISES 


FOUfttH    EDITION 


CHICAGO 
Laird  &  Lee,  Inc.,  Publishers 


36fc 


^^^^^ 


\(\\ 


«: 


Copyright  1907,  1909,  1910,  191 1 

BY  Robert  J.  Frank 

Copyright  1914,  by  Robert  J.  Frank 


ALL  RIGHTS  RESERVED 


CONTENTS 


INTRODUCTORY. 
CHAPTER  I. 

ORGANIZATION. 

Common  Errors. 

The   Corporation  and   Its   Advantages. 
How  to  Organize  a  Corporation. 
Where  to  Organize. 

CHAPTER  11. 

CORPORATE  FINANCING. 

Capital,  Bonds  and  Stocks. 

Capitalization  of  Corporations. 

Raising  Additional  Capital. 

Transferring  An  Established  Business  to  a  Corporation. 

CHAPTER  III. 

CORPORATE  MANAGEMENT. 

Directors,    Officers — Their   Duties   and   Liabilities. 
Stockholders*   Rights   and   Liabilities. 
By-Laws  and  Their  Uses. 
Corporate  Records  and  Books  of  Account. 
Examination  of  Books  and  Records. 


CONTENTS. 

CHAPTEE  IV. 

EEORGANIZATION  AND  CONSOLIDATION  OF 
ENTERPEISES. 

Reorganization — Possible    Advantages    Therefrom. 

Consolidation   of  Enterprises. 

Stock-Jobbing. 

CHAPTER  V. 

PROMOTION  OF  ENTERPRISES. 

Promoters. 

Promotion   Contracts. 

Good    Will — Trademarks    and    Trade    Names. 

Patents  and   Their   Commercial   Value. 

Mining  Enterprises. 

APPENDIX. 

Containing  General  and  Special  Forms  of  Contracts,  Reorgan- 
ization and  Installment  Certificates,  Proposition  to  sell  Assets  to 
newly  organized  Company,  Offering  of  Stock,  By-Laws,  Resolu- 
tions, etc.;  also  a  synopsis  of  the  Corporation  Laws  of  favorite 
States  for  incorporating,  rules  for  Listing  Stocks  and  Bonds, 
forms  of  Option  Contracts,  table  showing  the  Earnings  of  Stocks 
and  Bonds,  and  other  special  matter  relating  to  the  above  subjects. 


PREFACE 


The  object  of  this  volume  is  to  condense  into 
one  readable  book  an  educational  discussion  of  the 
fundamental  practical  questions  which  are  pre- 
sented in  the  organization,  reorganization  and 
financing  of  business  enterprises,  that  are  not 
within  the  scope  of  a  strictly  legal  treatise;  for 
the  benefit  of  incorporators,  officers  and  directors 
of  corporations,  financiers,  accountants  and  in- 
vestors, as  well  as  all  other  persons  who  are 
interested  in  modern  business. 

When  the  first  edition  of  this  book  appeared 
(in  1907)  no  published  information,  in  connected 
form,  on  the  subject  here  discussed  was  available ; 
and  while  a  number  of  separate  treatises — on  dif- 
ferent branches  of  the  subject  here  treated  as  one 
— have  since  been  published,  no  other  single 
volume  has  appeared  professing  to  cover  just  the 
same  ground. 

It  may  be  said  that  this  book  reflects — in  a  large 
measure — experiences  and  personal  theories  of 
the  author ;  at  the  same  time  including  and  adopt- 
ing the  theories  and  principles  of  others  that  have 
received  approval  in  the  world  of  business  and 

11 


1'2*  •*'*'*'    'preface. 

finance.  And  while  the  selection,  arrangement  and 
manner  of  treatment  of  the  subjects  discussed  are 
somewhat  arbitrary — and  not  in  harmony  with 
the  equally  arbitrary  arrangement  now  adopted 
by  academic  instructors  and  authors — ^yet  it  is 
believed  that  the  manner  of  presentation  here 
adopted  will  convey  to  the  reader  a  sufficient 
understanding  of  the  subject  discussed  for  all 
practical  purposes. 

If  any  explanation  is  wanting  for  the  appear- 
ance of  four  separate  editions  of  this  work  within 
a  decade,  it  must  be  found  in  the  frank  admission 
that  competent  critics  of  both  the  form  and  sub- 
stance of  former  editions  have  offered  valuable 
suggestions  from  time  to  time — and  the  author's 
subsequent  research  and  experiences  in  active 
practice  and  in  nearly  every  state,  have  shown 
wherein  the  book  could  be  improved,  i.  e.,  made 
more  comprehensive,  useful  and  reliable;  then 
the  generous  reception  and  patronage  that  have 
been  accorded  this  book  throughout  have  fur- 
nished whatever  additional  incentive  was  required 
to  induce  the  author  to  avail  himself  of  every 
opportunity  to  make  the  work  creditable,  reliable 
and  authoritative. 

Robert  J.  Frank. 

Chicago,  June,  1914. 


INTRODUCTORY 


Before  the  advent  of  the  corporation,  or  before 
the  ahnost  universal  adoption  of  that  form  of 
conducting  business,  those  responsible  for  the 
success  or  failure  of  an  enterprise  were  princi- 
pally concerned  about  its  details.  Now  such 
details  are  delegated  to  subordinates,  and  the 
actual  head  of  the  enterprise  is  more  intimately- 
concerned  with  its  policy  and  its  financial  plans 
and  general  undertakings. 

It  has  been  said  that  the  type  of  man  who  has 
genius  for  acquiring  exact  technical  knowledge  is 
not  ordinarily  a  successful  executive,  and  the 
accuracy  of  this  statement  must,  in  a  measure, 
be  admitted;  but  it  must  also  appear  to  those 
familiar  with  present  conditions  that  the  success- 
ful executive  not  only  necessarily  possesses  an 
intimate  general  knowledge  of  the  science  per- 
taining to  the  particular  enterprise  under  his 
control,  but  an  equal  general  knowledge  of  the 
established  rules  concerning  corporate  organiza- 
tion and  finance,  and  the  elementary  rights  of 
stockholders,  as  well  as  the  duties  and  responsi- 
bilities of  corporate  officers. 

13 


14  INTRODUCTOBY. 

It  is  clearly  beyond  the  possibility  or  legitimate 
purposes  of  any  bock  to  attempt  to  so  qualify  its 
readers  as  to  enable  them  to  dispense  with  the 
services  of  the  legal  profession ;  but  it  is  possible 
to  give  such  a  general  announcement  of  the  law 
and  approved  procedure  pertaining  to  corporate 
organization  and  financing — and  particularly  the 
practical  features  relating  thereto — as  will  be  of 
inestimable  value  to  those  charged  with  the 
responsibilities  of  such  undertakings,  and  at  the 
same  time  suggest  to  the  practicing  lawyer  who 
has  not  specialized  along  those  lines  the  important 
practical  questions  which  inevitably  arise  for  con- 
sideration in  the  course  of  such  employment. 

Particularly  is  this  true  concerning  the  reorgan- 
ization of  a  business  enterprise  where  the  adop- 
tion of  corporate  plans  for  its  conduct  is  con- 
cerned. Innumerable  questions  there  arise  which 
ordinarily  do  not  receive  the  attention  they 
deserve  on  account  of  their  far-reaching  effect 
upon  the  success  or  failure  of  the  enterprise,  or 
upon  the  rights  of  the  individuals  interested 
therein. 

The  contents  of  this  volume  may  properly  be 
termed  a  discussion  of  the  middle  ground  between 
what  is  ordinarily  considered  within  the  employ- 
ment and  province  of  the  lawyer — ^who  is  called 
upon  to  create  the  corporate  entity  which  is  to 
conduct  a  new  enterprise,  or  to  take  over  the 


INTRODUCTORY.  15 

property  of  or  reorganize  an  old  one — and  what 
is  reasonably  to  be  considered  within  the  knowl- 
edge of  the  ordinary  promoter  or  the  individuals 
actually  interested  in  such  undertakings. 

Every  mistake  in  the  organization  of  a  business 
corporation  discloses  ample  evidence  of  either 
lack  of  proper  knowledge  of  the  questions  con- 
stituting the  middle-ground  referred  to,  or  (what 
is  equally  disastrous  to  the  enterprise)  the  fail- 
ure to  put  such  knowledge  into  execution;  and 
this  might,  and  often  does  arise  on  account  of 
the  fact  that  the  employment  of  or  instructions 
given  the  corporation  attorney  have  been  limited 
to  simply  complying  with  the  statutory  formal- 
ities in  the  creation  of  the  corporate  entity. 

Strictly  speaking,  the  lawyer's  duty  is  dis- 
charged by  simply  complying  with  the  instruc- 
tions of  his  client,  be  they  ever  so  faulty;  and 
the  client  is  rarely  ever  qualified  to  decide  for 
himself  the  most  important  preliminary  questions 
that  arise  when  the  first  steps  are  to  be  taken  in 
launching  a  modem  business  venture,  namely :  the 
creation  of  the  corporation  which  is  to  own  and 
conduct  it.  Its  purposes,  capitalization  and  finan- 
cial plans,  adequate  protection  for  investors  or 
the  owners  of  property  to  be  conveyed,  and  rules 
for  internal  conduct,  etc.,  are  each  and  all  matters 
of  first  importance,  either  immediately  or  at  some 
future  period  of  development ;  and  these  and  other 


16  INTRODUCTORY. 

questions  of  like  significance  are  not  met  with  in 
every-day  affairs  of  business  life,  and  rarely  in 
the  general  practice  of  law. 

A  careful  examination  of  all  the  works  on  cor- 
poration law  now  in  existence  fails  to  disclose  any 
adequate  discussion  of  the  field  alluded  to  above ; 
and  this,  perhaps,  on  account  of  the  difficulty 
attending  such  a  venture,  owing  to  the  great 
variety  of  conditions  which  are  encountered  in 
actual  practice,  and  the  almost  hopeless  task  of 
attempting  to  cover  such  field  in  any  satisfactory 
manner.  But  it  is  believed  that  a  brief  and  con- 
cise announcement  of  the  general  principles  cover- 
ing the  practical  questions  referred  to,  (which 
have  been  established  by  precedent  as  practical) 
and  an  equally  general  discussion  of  the  settled 
law  relating  thereto,  must  necessarily  be  of  value, 
particularly  to  the  student  or  executive  who  is 
desirous  of  acquiring  a  knowledge  along  such 
lines,  and  who  is  not  inclined  or  able  to  devote  the 
time  necessary  to  an  extended  research,  much  less 
to  acquire  the  experience  necessary  to  apply  such 
knowledge  once  it  is  obtained. 

It  may  appear  to  those  who  simply  review  the 
contents  of  this  volume,  or  who  are  unfamiliar 
with  its  purpose,  that  the  arrangement  of  the 
subjects  are  somewhat  unsystematic,  and  that  it 
discusses  only  legal  questions  generally.  It  is  to 
be  hoped,  however,  that,  upon  a  more  careful 


INTRODUCTOBY.  17 

study  of  the  volume  as  a  whole,  the  connection 
and  continuity  will  be  disclosed,  and  the  fact 
appreciated  that  a  general,  rather  than  a  particu- 
lar discussion  of  the  subjects  in  hand  is  more  to 
be  desired — as  being  of  greater  permanent  prac- 
tical value, — than  an  extended  academic  discussion 
of  details  involving  circumstances  or  conditions 
which  may  never  be  met  in  actual  business  life,  or 
those  which  have  become  obsolete  and  abandoned 
as  impractical. 

In  every  work  of  this  character  many  questions, 
often  considered  elementary,  are  necessarily  dis- 
cussed, for  the  reason  that  every  book  treating  on 
any  science  must  anticipate  that  such  a  work  will 
more  often  fall  into  the  hands  of  those  unfamiliar 
with  such  questions  than  otherwise. 

A  study  of  the  legal  phase  of  business  organiza- 
tion and  development  necessarily  involves  the 
consideration  of,  at  least,  four  distinct  subjects, 
viz. :  Corporation  Law,  Corporation  Finance,  Cor- 
poration Accounting  and  Business  Economics 
generally.  Then  the  practical  questions  that  are 
ever  presenting  themselves  for  solution  in  the 
application  of  theoretical  principles  to  practical 
demands,  makes  work  in  this  comparatively 
modern  field  one  of  the  most  exacting  of  occupa- 
tions and  one  that  should  eventually  occupy  a 
place  among  the  various  recognized  specialties  of 
which  the  practice  of  law  is  now  composed. 


18  INTEODUCTOEY. 

The  illustrations  given  in  the  Appendix  are 
(with  omissions  of  names  and  other  personal  ref- 
erence) instruments  which  have  been  put  into 
actual  service  by  the  author  and  are  here  included 
to  supplement  and  explain  certain  important  state- 
ments or  plans  referred  to  in  the  text,  and  at  the 
same  time  serve  as  suggestions  for  adaptation  by 
the  Profession. 


SCIENCE  OF  ORGANIZATION 


Frank's  "Science  of  Organization,**  etc. 


SCIENCE  OF  ORGANIZATION 


CHAPTER  I. 

ORGANIZATION. 

Common  Errors.  How  to  Organize  a  Corporation. 

The  Corporation  and  Its  Advan-      Where  to  Organize, 
tages. 

Common.  Er-      Everv  business  has  peculiarities 

XOT9, 

and  mysteries  that  cannot  be  solved 
by  intuition,  and  the  controlling  elements  that 
make  for  success  (when  recognized  at  all)  are 
often  the  result  of  the  accidental  occurrence  of 
circumstances  rather  than  the  result  of  any  pre- 
conceived plan.  But  there  are  elements  which 
lead  to  certain  failure,  and  they  may,  in  most 
cases,  be  **seen  from  afar''  and  avoided  by 
seasonable  consideration. 

More  money  has  often  been  made  or  lost 
through  the  plans  adopted  for  financing,  organiz- 
ing or  reorganizing  a  business  than  in  its  opera- 
tion; at  the  same  time  mistakes  in  such  plans 
often  prevent  well-merited  success  or  occasion 
individual  sacrifice. 

21 


22  ORGANIZATION. 

There  is  often  a  tendency  in  the  selection  and 
promotion  of  a  new  enterprise  to  look  primarily, 
and  almost  exclusively,  to  the  **  opportunities '  * 
of  the  business,  and  to  disregard  the  equally 
important  questions  concerning  the  formation,  or 
methods  to  be  adopted  for  its  successful  conduct. 

Experience  has  demonstrated  that  a  business 
opportunity,  otherwise  promising,  may  be  unsuc- 
cessful without  a  proper  basis  for  operation, 
adequate  working  capital  or  executive  ability 
behind  it  to  organize  the  details  and  properly  con- 
duct such  a  business. 

Then  in  this  day  of  corporations,  how  fre- 
quent and  familiar  it  is  to  observe  business  men, 
with  a  more  or  less  promising  business,  creating 
corporate  securities  thereon — regardless  of  their 
appropriateness  for  the  purpose  intended  or 
occasion  offered, — and  to  then  go  into  the  market 
in  search  of  a  broker  or  promoter  who  handles 
*  *  securities ' '  and  expect  to  thereby  obtain  capital 
for  their  needs,  and  this  at  a  minimum  cost  or 
expense;  or  to  recount  the  numberless  instances 
where  business  men  are  seeking  after  **some  one^' 
who  will  secure  capital  for  their  undertaking,  and 
expect  to  find  those  who  are  regularly  employed 
in  such  a  calling,  to  say  nothing  of  the  unbusiness- 
like and  absurd  terms  and  conditions  that  the  same 


ORGANIZATION.  23 

seekers  after  capital  expect  to  arbitrarily  impose 
upon  these  magical  creatures,  once  they  are  found. 

To  err  in  the  inception  of  a  business  under- 
taking, in  its  organization,  or  in  some  apparently 
minor  detail,  may  mean  a  handicap  throughout; 
and  the  consequences  of  faulty  formation,  or 
errors  of  judgment  in  matters  of  finance  are  rarely 
discovered  until  experience  has  pointed  them  out, 
and  frequently,  after  it  is  too  late  to  remedy 
them. 

Then,  it  is  but  natural  to  refuse  to  see  or  admit 
such  mistakes  after  they  are  once  made,  and  to 
proceed  upon  a  theory  that  has  proven  to  be 
erroneous  or  without  the  promise  of  ultimate 
financial  reward  to  those  most  deserving. 

There  are  no  undertakings  in  business  affairs 
where  so  many  opportunities  for  the  exercise  of 
skill  and  experience  are  presented,  and  where  the 
same  are  so  essential  to  success,  as  in  the  re-ad- 
justment of  the  affairs  of  an  established  business 
— such  as  the  devising  of  practical  attractive  and 
advantageous  plans  for  the  securing  of  its  working 
capital,  and  in  the  regeneration  of  its  vitality. 

The  business  with  a  proper  foundation  is  at 
least  one-third  a  success ;  the  other  two-thirds  may 
usually  be  acquired  by  opportunity,  and  proper 
and  adequate  facilities. 


24  ORGANIZATION. 

The  Corpora-      Corporations  as  instniments  of 

tion   audits..  •-••  -,  ^  ■^ 

Advantages.  Dusiiiess  are  iiow  iiidispeiisable ;  and 
it  is  necessary  that  their  importance  and  charac- 
teristics generally  should  be  familiar  to  all  who 
are  directly  or  indirectly  interested  in  their  crea- 
tion and  conduct.  No  effective  substitute  can  be 
invented  that  will  take  its  place  in  the  business 
world,  although  numerous  recent  attempts  have 
been  made  in  this  direction. 

The  Supreme  Court  of  the  United  States  has 
said  that  **  Private  corporations  are  but  asso- 
ciations of  individuals  united  for  some  common 
purpose,  and  permitted  by  the  law  to  use  a  com- 
mon name,  and  to  change  its  members  without 
dissolution  of  the  association."  And  also,  **A 
corporation  is  an  artificial  person  created  by  law 
as  the  representative  of  those  persons,  natural 
or  artificial,  who  contribute  to,  or  become  holders 
of  shares  in  the  property  entrusted  to  it  for  a 
common  purpose.  As  it  is  the  creature  of  positive 
law,  its  rights,  powers  and  duties  are  prescribed 
by  the  law. ' ' 

The  legitimate  purposes  of  the  corporation  are 
to  provide  a  modern  system  for  the  conduct  of 
business,  to  enable  two  or  more  individuals  to 
combine  their  capital  and  efforts  in  the  accom- 
plishment of  a  common  purpose,  and  also  to 
obviate  the  risks  and  many  other  disadvantages 


ORGANIZATION.  25 

of  the  obsolete  co-partnership  and  private  owner- 
ship of  enterprises. 

The  fact  that  great  fortunes  have  been  amassed 
and  ^  trusts  *'  created  through  this  modern  system 
simply  demonstrates  the  weakness  in  the  laws  of 
the  various  States  where  such  organizations  have 
their  existence  and  domicile,  and  should  not 
militate  against  the  plan  itself. 

The  legitimate  advantages  of  incorporating  a 
business  are  many  and  varied.  It  is  impracticable 
to  enumerate  and  succinctly  define  all,  or  any 
considerable  number  of  them.  Among  the  most 
prominent,  however,  are  the  following : — 

It  exclusively  perpetuates  any  trade  name,  and 
incidentally  the  good  will  attached  thereto. 

It  eliminates  the  dangers  of  personal  liability 
beyond  the  money  originally  invested  which 
attaches  to  any  business  conducted  by  an  individ- 
ual or  co-partnership. 

It  enables  the  organizer  to  engage  in  different 
pursuits,  to  more  successfully  conduct  an  enter- 
prise, or  enlarge  the  same,  with  a  limited  amount 
of  individual  capital. 

Upon  the  death  of  a  stockholder,  or  disagree- 
ment, or  separation  of  the  management,  the  busi- 
ness is  not  necessarily  hampered  or  interrupted, 
and  the  transfer  of  the  individual  interest  of  any 
stockholder  is  simplified,  and  its  value  readily 
determined. 


26  OKGANIZATION. 

The  capital  invested  can  be  increased  at  any 
time  to  admit  of  expanding  the  business,  or  to 
enable  competing  enterprises  to  join  forces,  with- 
out disadvantage  to  either. 

Employes  or  customers  may  be  permitted  to 
become  interested  in  the  enterprise  without  the 
danger  of  dissolution  or  other  possible  objection- 
able entanglements  which  almost  invariably  occur 
through  disagreement  of  co-partners. 

Any  stockholder  may  pledge  his  individual 
stock  to  obtain  individual  accommodation  without 
jeopardizing  the  interests  of  the  corporation, 
which  cannot  be  done  by  a  partner  in  a  co-partner- 
ship; besides,  the  individual  debts  or  personal 
entanglements  of  any  stockholder  will  not  inter- 
fere with  the  existence  or  standing  of  the  corpora- 
tion. 

Then,  the  advantages  of  the  individual  stock- 
holder of  raising  funds  upon  his  individual 
interest  in  an  enterprise  (stock)  over  that  of  any 
other  form  of  personal  property  is  apparent. 

In  the  majority  of  cases  a  business  may  be  sold 
outright  to  a  much  better  advantage  by  first  incor- 
porating it.  It  is  less  difficult  to  find  a  number 
of  persons  who  would  take  stock  in  a  company 
that  owned  an  attractive  business  than  to  find  an 
individual  who  could  purchase  the  whole;  and 
besides,  the  value  of  the  Good  Will  can  be,  in  this 
way,  preserved  and  realized  upon,  and  the  price 


OBGANIZATION.  27 

of  the  business  fixed  by  the  owner  before  it  is 
offered  for  sale. 

Probably  the  most  important  of  all  the  advan- 
tages are  the  opportunities  which  are  possible  to 
the  resourceful  individual,  and  which  present 
themselves  in  almost  every  undertaking,  and  they 
depend  entirely  upon  the  skill,  ability  and  experi- 
ence of  the  organizer  of  the  particular  corpora- 
tion. 


H  o  w  to  Or-      It  is  frequently  difiicult  to  appre- 

ganize  a  O  o  p-      .  ,  , 

poration.  ciatc  or  rcmcmbcr  that  a  corpora- 

tion is  an  artificial  being,  and  exists  independently 
of  the  stockholders  or  persons  interested  in  it. 
By  comprehending  and  bearing  this  fact  in  mind, 
all  questions  relating  to  a  corporate  existence  are 
simplified. 

These  artificial  beings,  *' invisible  and  intangi- 
ble," are  created  only  by  legislative  enactment. 
All  of  the  States,  however,  now  have  what  is 
termed  ** General  Acts,''  which  means  that  the 
Legislatures  of  the  various  States  have  prescribed 
methods  of  creating  corporate  bodies,  and  have 
delegated  to  a  certain  State  official,  or  officials, 
usually  the  secretary  of  state,  certain  powers  and 
duties  which  relieve  the  applicant  for  corporate 
license  from  the  delays  and  other  difficulties  inci- 
dent to  direct  application  to  the  Legislature  itself. 


28  ORGANIZATION. 

The  first  step  in  the  organization  of  a  business 
corporation  is  the  determination  by  the  parties 
to  be  interested  therein  upon  some  definite  object 
to  be  accomplished;  that  involves  the  important 
question  of  business  policy,  which  clients  are 
usually  expected  to  solve  for  themselves. 

For  convenience,  the  advantages  of  incorporat- 
ing have  been  treated  under  the  preceding  head; 
for  it  is  important  to  understand  such  advantages 
in  connection  with  the  purposes  in  view.  In  fact, 
the  contents  of  this  book  are  especially  intended  to 
be  helpful  in  determining  these  and  other  impor- 
tant practical  questions,  and  the  principal  purpose 
thereof  is  to  supply  such  information  as  is  other- 
wise inaccessible,  and  it  will  be  necessary  to  refer 
to  the  various  headings  for  a  full  explanation  and 
discussion  of  the  questions  here  suggested. 

After  the  objects  which  it  is  desired  to  obtain 
have  been  agreed  upon  and  formulated,  the  capi- 
talization fixed,  and  all  other  preliminary  ques- 
tions are  settled  the  next  step  is  to  apply  to  the 
Secretary  of  State  for  a  charter  or  Certificate  of 
Incorporation,  etc. 

This  application  (whether  in  the  form  of  a  pre- 
liminary contract  or  formal  application)  usually 
sets  forth  the  corporate  name  selected;  the  objects 
for  which  the  corporation  is  to  be  formed;  the 
amount  of  capital  stock ;  the  amount  of  each  share ; 
the  number  of  shares;  the  location  of  the  prin- 


ORGANIZATION.  29 

cipal  office  of  the  corporation,  and  its  duration 
of  corporate  life. 

Upon  the  receipt  of  the  application  properly 
made  out  and  executed,  the  Secretary  of  State  is- 
sues the  Certificate  of  Incorporation  or  Charter; 
this  instrument  empowers  the  parties  named 
therein  to  proceed  with  the  incorporation,  as  pro- 
vided by  the  law  of  the  state  creating  it,  or  to  pro- 
ceed with  the  business  of  the  company,  as  the  case 
may  be. 

In  selecting  the  corporate  name,  reference 
should  be  had  to  the  business  contemplated,  if  this 
is  feasible,  and  the  name  should  be  as  short  and 
euphonious  as  possible.  The  retention  of  an 
established  trade  name  is  always  desirable,  and 
can  usually  be  accomplished  without  difficulty. 

Care  should  be  exercised  in  avoiding  the  selec- 
tion of  the  name  of  a  corporation  in  existence, 
either  in  the  State  where  the  charter  is  obtained, 
or  elsewhere,  for  under  the  recent  law  of  ** Unfair 
Competition,"  now  recognized  by  all  courts,  it 
has  been  held  that  an  injunction  would  lie  to 
restrain  the  use  of  a  corporate  name  so  similar 
to  one  already  in  existence  that  it  would  create 
confusion  in  trade,  and  otherwise  be  injurious  to 
the  business  of  the  company  having  a  prior  cor- 
porate existence. 

The  objects  of  the  corporation  are,  perhaps, 
the  most  important  legal  rights  to  be  protected  in 


30  OKGANIZATION. 

the  formation  of  a  corporation,  for  they  frequently 
give  the  incorporators  many  advantages  in  the 
future  development  of  the  business.  While  it  is 
always  desirable  to  make  the  objects  contemplated 
as  broad  as  possible,  it  is  necessary  under  the 
statutes  of  some  states  to  limit  the  objects  of  the 
corporation.  It  must  be  borne  in  mind  that  the 
doing  of  business  ultra  vires  (outside  the  scope 
of  the  objects  set  forth  in  the  application)  is 
unlawful,  and  may  result  in  loss  to  the  company 
and  lead  to  other  complications. 

Determining  the  amount  of  capital  stock  is  a 
subject  of  sufficient  importance  to  call  for  individ- 
ual treatment  under  a  separate  heading.* 

The  amount  of  the  shares  must  not  be  less  than 
$10,  nor  more  than  $100  in  the  State  of  Illinois, 
and  there  is  such  a  limitation  imposed  in  nearly 
all  the  states  of  the  Union.  As  to  the  duration 
of  the  existence  of  the  corporation,  this  may  be 
made  the  safeguard  or  otherwise  of  the  rights  of 
the  parties ;  that  is,  if  it  is  desired  to  conduct  the 
enterprise  for  a  limited  time,  that  fact  can  be  set 
forth  in  the  application ;  and,  in  consequence,  the 
corporation's  life  will  end  upon  the  termination 
of  the  time  limit  thus  set  forth.  This  means  that 
the  affairs  of  the  corporation  must  be  wound  up 
at  that  time,  regardless  of  the  wishes  of  the  stock- 

*  *  *  Capitalization  of  Corporations,  * '  page  54. 


ORGANIZATION.  31 

holders,  and  without  any  further  action  being 
taken  by  them  which  could  not  be  done  without 
disastrous  litigation  if  such  time  limit  was 
omitted. 

On  the  other  hand,  if  it  is  not  desired  to  have 
a  limited  undertaking,  the  duration  of  the  cor- 
poration should  be  ninety-nine  years  (the  time 
limit  in  Illinois),  or  perpetual,  or  the  limit  of 
time  permitted  by  the  laws  of  the  state  selected; 
for  one  of  the  chief  assets  of  a  business  is  its 
trade  name,  and  this  should  be  more  valuable  each 
succeeding  year. 

Under  ordinary  circumstances,  a  particularly 
important  step  in  the  organization  of  a  corpora- 
tion is  the  payment  of  the  subscriptions  to  the 
capital  stock,  or,  if  there  be  no  formal  subscrip- 
tions, then  payment  of  the  capital  stock  to  be 
issued. 

Under  the  laws  of  some  states,  it  is  necessary  to 
pay  in  a  certain  percentage  of  the  authorized  cap- 
ital, ranging  from  a  nominal  amount  to  one-half 
of  the  same. 

Care  must  be  exercised  in  accepting  property 
in  payment  for  capital  stock  by  the  commission- 
ers, or  directors  as  the  case  may  be,  or  they  as- 
sume a  liability  which  they  may  not  contemplate, 
or  intend  to  assume. 

In  the  Appendix  will  be  found  a  copy  of  a  res- 
olution which  it  is  considered  covers  this  question 


32  OKGANIZATION. 

in  a  practical  way,*  and  the  subject  of  taking  over 
assets  other  than  cash  in  payment  of  stock  in  a 
new  corporation  is  treated  at  length  hereinafter.! 

Appraisals  of  property  to  be  taken  in  payment 
for  stock  are  always  advisable,  if  not  necessary, 
both  by  the  commissioners  and  directors  when 
elected,  and  as  to  the  valuation  of  such  property, 
that  is  also  treated  hereinafter.! 

Separate  minutes  of  the  acceptance  and  ap- 
praisal of  property  by  the  commissioners  or  or- 
ganizers should  be  entered  in  the  Minute  Book 
for  their  own  protection,  and  as  a  basis  for  a 
resolution,  by  the  directors,  in  taking  over  the 
property,  after  the  corporation  is  formed. 

Upon  the  meeting  day  of  the  subscribers  to 
the  capital  stock,  the  usual  formalities  should  be 
observed  in  all  particulars,  in  the  holding  of  the 
first  meeting  and  transaction  of  business  thereat, 
and  the  minutes  should  be  preserved  and  re- 
corded in  the  Minute  Book  of  the  corporation,  and 
signed  by  the  parties  in  interest,  if  they  are  not 
too  numerous ;  at  any  rate,  they  should  be  signed 
by  the  commissioners  or  incorporators  and  at- 
tested by  the  secretary. 

At  this  meeting,  the  subscribers  to  the  capital 
stock   or   incorporators,   usually   elect  the   first 

*  Appendix,  page  244. 

t  '  *  Transferring  An  Established  Business  to  a  Corporation, ' ' 
page  80. 


ORGANIZATION.  33 

Board  of  Directors,  and  this  is  important  in  re- 
lation to  the  future  management  and  control  of 
the  corporation,  for  the  ensuing  year,  at  least ;  for 
it  must  be  borne  in  mind  that  the  directors  control 
the  offices  of  the  corporation,  and  not  the  stock- 
holders, and  that  the  officers  in  turn  transact  the 
business  of  the  corporation. 

The  Statutes  of  Illinois  relating  to  directors 
provide  that  the  number  of  directors  shall  be 
fixed  at  the  first  meeting  of  the  subscribers,  and 
their  number  depends  wholly  upon  the  will  of  the 
incorporators.  Such  subscribers  in  Illinois  may, 
if  they  see  fit,  divide  the  Board  of  Directors  into 
three  classes;  the  term  of  office  of  the  first  class 
expiring  on  the  date  of  the  annual  election  of  the 
company  then  next  ensuing;  the  second  class  one 
year  thereafter,  and  the  third  class  two  years 
thereafter.  Thus,  at  each  annual  election  for  di- 
rectors after  such  classification,  the  stockholders 
elect,  for  the  term  of  three  years,  the  number  of 
directors  constituting  such  class  whose  term  then 
expires.  In  this  way,  one  or  more  directors  will 
hold  office  from  the  beginning  of  the  organization 
for  three  years,  others  for  two  years,  and  still 
others  for  one  year,  if  for  any  reason  this  plan 
be  advisable,  as  it  frequently  is  in  large  corpora- 
tions. The  usual  plan,  however,  is  to  elect  the 
entire  Board  of  Directors  for  a  period  of  one 


34  ORGANIZATION. 

year,  particularly  in  small  or  close  corporations 
and  under  the  laws  of  most  states. 

In  Illinois  three  commissioners  hold  the  title 
to  the  property  or  funds  of  the  corporation  in 
process  of  formation,  which  have  been  turned 
over  to  them  in  accordance  with  the  law^,  and  it  is 
then  necessary  for  them  to  make  a  report  in  due 
form  of  the  proceedings  suggested  above  and 
forward  it  to  the  Secretary  of  State,  who  upon  its 
receipt  (if  in  all  things  it  complies  wdth  the  law 
and  the  original  application)  then  issues  a  cer- 
tificate of  complete  organization,  and  the  Com- 
missioners or  their  Counsel  should  at  once  record 
the  same  in  the  office  of  the  Recorder  of  Deeds 
of  the  county  where  the  principal  oflice  of  the  cor- 
poration is  located;  for  this  is  a  condition  pre- 
cedent to  the  corporate  life  of  the  company,  or  its 
right  to  transact  any  other  business  than  that 
already  explained;  and  the  recording  of  the 
charter  or  certificate  of  organization  is  likewise 
required  in  all  states. 

In  the  adoption  of  a  code  of  by-laws  for  the 
government  of  the  company,  it  is  well  to  remem- 
ber that  the  by-laws  are  the  internal  laws  of  the 
corporation,  and  as  such  should  set  forth  rules 
necessary  for  the  proper  conduct  of  the  business. 
This  has  been  made  the  subject  of  a  separate  dis- 
cussion,* and,  therefore,  need  not  be  further  al- 
luded to  at  this  time. 

* ''By-Laws  and  Their  Uses,''  page  106. 


ORGANIZATION.  35 

While  it  is  impossible  to  prepare  **  stock  by- 
laws*' that  will  meet  all  the  requirements  of  in- 
corporators generally,  still  the  form  given  in  the 
Appendix  heretof  will  be  found  to  be  adaptable, 
(with  minor  changes,  to  conform  to  the  legal  and 
business  requirements  hereinafter  suggested)  to 
the  ordinary  business  corporation  organized 
under  the  laws  of  any  state. 

After  the  adoption  of  a  set  of  by-laws  for  the 
government  of  the  corporation,  the  next  step  to 
be  taken  is  the  election  of  officers,  and  they  will 
be  such  as  the  by-laws  have  provided  for.  The 
laws  of  most  states  require  every  business  cor- 
poration to  have  a  President,  a  Secretary  and  a 
Treasurer;  and  leaves  it  discretionary  with  the 
directors  as  to  how  many  additional  offices  they 
shall  create. 

If  assets  have  been  turned  over  to  be  applied 
upon  the  payment  of  stock  subscriptions,  the 
Board  of  Directors  should  (as  before  stated) 
invariably  appraise  the  same  and  approve  or  dis- 
approve the  action  of  the  commissioners  or  organ- 
izers in  this  regard ;  for  inasmuch  as  the  corpora- 
tion contemplated  may  not  yet  be  in  legal  exist- 
ence, the  commissioners  or  organizers  are  the  only 
proper  persons  to  take  title  to  property,  or  to 
receive  advance  payments  on  account  of  stock  sub- 
scriptions and  for  that  purpose,  they  stand  in  the 

t  Appendix,  page  253. 


36  OBGANIZATIOlSr. 

relation  of  trustees  for  the  new  corporation  when 
formed. 

The  approved  method  of  taking  over  property 
or  advance  payments  made  by  the  stockholders 
to  the  commissioners  or  organizers  in  advance 
of  complete  organization,  is  for  the  Board  of 
Directors,  by  proper  resolution,  to  ratify,  con- 
firm and  adopt  the  acts  of  such  commissioners  or 
organizers  in  this  behalf,  if  such  acts  are  in  fact 
proper  and  deemed  for  the  best  interest  of  the 
corporation.  The  form  of  resolution  applicable 
for  this  purpose  already  alluded  to  will  serve  as  a 
guide  to  what  is  usual  under  the  circumstances 
here  indicated. 

The  rules  relating  to  the  valuation,  appraisal 
and  purchase  of  assets  by  a  new  corporation  are 
further,  and  at  length,  discussed  under  the  title, 
**  Transferring  An  Established  Business  to  a  Cor- 
poration."! 

After  the  foregoing  steps  have  been  taken,  and 
the  minutes  of  the  various  meetings  written  up 
in  the  Corporate  Eecord  Book,  the  ordinary  busi- 
ness corporation  is  in  existence,  fully  organized 
and  ready  for  the  transaction  of  any  business  for 
which  it  was  incorporated. 

The  question  of  *^how  to  create  the  corporate 
entity  before  the  principal  capital  becomes  inter- 
ested"  frequently  arises.     Particularly  is   this 

tPage  80. 


ORGANIZATION.  37 

SO  where  the  incorporators  have  a  limited  amount 
of  capital,  or  the  corporation  is  being  created  for 
the  purpose  of  taking  over  a  business  already  es- 
tablished, or  for  reorganization  purposes,  and 
the  details  of  such  undertaking  have  not  been  en- 
tirely settled.  In  such  a  case  it  is  possible  to 
accomplish  the  object,  and  fully  comply  with  the 
law  wherever  such  law  requires  a  certain  percent 
of  the  capital  stock  to  be  paid  in  before  complete 
organization,  etc.,  by  first  incorporating  with  a 
nominal  capitalization,  and  afterward  increas- 
ing the  capital  stock  to  the  amount  originally 
contemplated  or  desired. 

The  Corporation  Laws  of  the  various  States 
differ  somewhat  materially  in  the  manner  and 
form  of  creating  a  corporation,  and  it  is  beyond 
the  scope  of  this  book  to  undertake  to  discuss  the 
details  of  the  various  acts;  the  formalities  re- 
quired for  their  compliance  must  necessarily  be 
entrusted  to  those  familiar  with  such  laws  as  they 
exist  at  the  time  of  organization;  but  the  essen- 
tial practical  features  of  the  organization  of  busi- 
ness corporations  are  much  the  same  everywhere, 
and  they  are  discussed  above  and  under  the  vari- 
ous headings  that  follow. 


wiiere  to  Or-      Like  most  questions  of  procedure, 
eanixe.  ^jjjg  jg  q^q  depending  largely  upon 

the  circumstances  of  each  individual  case.    There 


38  OKGANIZATION. 

are  no  general  rules  which  can  be  applied  when 
the  ultimate  success  of  the  enterprise  is  consid- 
ered. 

So  far  as  the  most  favorable  laws  are  con- 
cerned, that  is  always  subordinate  to  the  more 
important  questions  of  business  policy.  For 
instance,  one  State  may  offer  inducements  in  the 
way  of  reduced  incorporation  fees  and  enlarged 
privileges — ^in  short,  a  more  favorable  franchise, 
but  when  this  is  compared  with  the  other  objects 
sought  to  be  accomplished,  it  is  of  little  import- 
ance to  the  organizer. 

Many  a  corporation  has  been  handicapped  by 
making  the  fatal  mistake  in  organizing  under  the 
laws  of  some  foreign  State.  Usually  companies 
with  ulterior  objects  seek  domicile  in  a  State  of- 
fering the  greatest  latitude  for  their  purposes — 
this  fact  being  so  notorious  that  it  is  often  prima 
facie  a  reflection  upon  legitimate  undertakings  to 
go  away  from  **home''  for  the  purpose  of  organi- 
zation. However,  this  reflection  may  be  removed 
by  explanation,  when  the  peculiar  circumstances 
of  the  particular  case  justify  the  selection  of  a 
foreign  State  for  incorporation,  as  they  fre- 
quently do,  particularly  by  large  undertakings  that 
contemplate  the  establishment  of  branches  in 
different  parts  of  the  country. 

Delaware  and  Maine  have  gone  a  long  way  to- 
ward encouraging  corporations   to   organize  in 


ORGANIZATION.  39 

their  respective  States ;  North  and  South  Dakota, 
Virginia,  West  Virginia,  New  York  and  Arizona 
have  attempted  to  do  likewise,  and  the  laws  of 
all  these  States  have  their  peculiar  advantages, 
particularly  over  those  of  some  of  the  other 
States  where  corporations  would  naturally  desire 
to  locate  on  account  of  the  business  advantages 
offered. 

It  will  be  found  that  in  the  States  where  busi- 
ness is  most  centralized,  and  where  the  actual 
business  of  most  business  corporations  is  trans- 
acted, the  laws  are  more  or  less  stringent,  and 
some  are  unreasonable  and  obsolete ;  but,  in  some 
of  these  last-mentioned  States  the  intention  at 
least  is  to  protect  stockholders  and  creditors,  and 
for  the  legitimate,  well-meaning  enterprise  it  is 
often  best  to  submit  to  these  conditions  and  or- 
ganize at  home. 

Particularly  is  this  true  where  outside  capital 
is  to  be  interested.  Prospective  investors,  as  a 
rule,  invest  their  money  under  the  advice  of  legal 
counsel,  and  local  attorneys  are  naturally  more 
familiar  with  the  laws  and  decisions  of  the  courts 
thereabout  in  their  own  State,  and  can  advise 
their  clients  more  readily  and  securely;  and  in 
addition  to  this  fact,  the  investing  clients  them- 
selves feel  more  secure  in  their  rights  when  the 
corporation  is  organized  under  the  local  State 
laws. 


40  ORGANIZATION. 

The  state  of  New  Jersey  was  one  of  the  first  to 
offer  inducements  to  foreign  corporations  in  the 
way  of  reduced  incorporation  fees  and  enlarged 
powers  and  limited  liability.  A  large  number  of 
the  modern  combination  organizations  were  at- 
tracted to  that  State  on  that  account,  but  the 
Legislature  has  very  recently  changed  the  laws, 
to  such  an  extent  as  to  make  it  necessary  or  ad- 
visable for  those  corporations  to  leave  that  State 
and  reincorporate  elsewhere,  particularly  in  Dela 
ware. 

It  must  be  borne  in  mind  that  in  nearly  all  of 
the  States  the  right  to  change  the  General  Incor- 
poration Act  is  reserved  by  the  Legislature,  and 
the  special  advantages  offered  may  be  diminished 
or  the  law  repealed  at  any  time,  and  such  priv- 
ileges of  the  corporation  thereby  curtailed. 

In  addition  to  this  possible  objection,  most 
States  have  recognized  the  fact  that  their  local 
capital  have  sought  other  States  for  tiie  purpose 
of  organization  only  to  evade  the  payment  of  the 
local  incorporation  fees,  and  to  otherwise  evade 
the  provisions  of  the  laws  of  the  respective  States 
where  such  corporations  in  fact  intend  to  oper- 
ate. To  protect  themselves,  special  acts  have 
been  passed  by  most  of  the  States,  similar  to  that 
now  in  force  in  Illinois,  which  defeats  nearly  all 
of  the  advantages  heretofore  obtained  by  organ- 
izing in  any  of  the  foreign  jurisdictions. 


ORGANIZATION.  41 

The  present  act  of  Illinois  relating  to  *  *  Foreign 
Corporations^*  is  given  verbatim  in  the  Appen- 
dix;* and  most  of  the  States  have  a  very  similar 
statute  for  the  regulation  of  foreign  corporations. 

For  the  convenience  of  prospective  incorpora- 
tors, a  synopsis  of  the  Corporation  Laws  of  the 
States  of  Delaware,  Maine,  and  Virginia  will  also 
be  found  in  the  Appendix,!  which  shows  the  spe- 
cial powers,  statutory  fees  and  other  information 
desirable  for  a  preliminary  understanding  and 
consideration  of  the  questions  to  be  talien  into 
account  when  selecting  a  State  in  which  to  or- 
ganize. 

The  various  statutes  of  those  States  deemed 
most  favorable,  and  above  referred  to,  have  nu- 
merous minor  provisions,  presumably  for  the  pro- 
tection of  stockholders  and  the  public  generally, 
which  often  serve  to  furnish  dissatisfied  stockhold- 
ers with  the  means  of  annoying  and  otherwise 
interfering  with  the  business  of  a  corporation 
organized  in  a  foreign  jurisdiction. 

It  will  be  seen,  by  reference  to  these  statutes, 
that  the  objects  to  be  obtained,  and  suggested 
here,  must  be  taken  into  consideration,  first  in 
this  as  well  as  in  other  questions  relating  to  the 
organization  of  a  business  corporation;  and  the 
important  question  to  decide  is  always,  What  ef- 

•  Appendix,  page  305. 
t  Appendix,  page  285. 


42  OKGANIZATION. 

feet  will  the  organization  of  the  particular  cor- 
poration under  the  laws  of  a  foreign  State  have 
upon  its  business  success? 

'  Whenever  the  laws,  conditions,  purposes  or 
plans  justify  the  decision  to  incorporate  in  a 
state  other  than  that  in  which  the  parties  in  in- 
terest reside,  or  where  the  principal  operations 
are  to  be  conducted,  it  is  of  first  importance  that 
a  proper  statutory  agent  or  local  representative 
be  chosen  to  represent  the  new  corporation,  both 
to  bring  it  into  existence,  and  thereafter  in  quali- 
fying under  the  laws  of  the  state  relating  to  domi- 
cile, such  as  maintaining  a  statutory  office,  acting 
as  local  resident  agent,  director  or  officer — as  the 
laws  may  require — for  the  acceptance  of  service 
of  legal  process,  the  keeping  of  certain  corporate 
books  or  records,  etc.,  all  of  which  require  reliable, 
competent  and  permanent  attention  in  order  that 
such  new  corporation  may  not  suffer  loss  through 
unknown,  or  unnecessary  litigation,  statutory 
fines,  etc. 

Similar  important  services  are  necessary  when 
any  corporation  attempts  to  comply  with  the 
various!  ** Foreign  Corporation  Acts''  by  estab- 
lishing local  branches  in  states  foreign  to  that  of 
their  creation;  and  here  as  before  suggested  the 
questions  of  reliability,  experience,  facilities  to 
serve,  and  permanency  (rather  than  economy) 
should  control  in  the  selection  of  a  representative 
for  the  conduct  of  such  foreign  affairs. 


CORPORATE  FINANCING 


Peank's  '^ Science  op  Organization,"  etc. 


CHAPTER  11. 

CORPORATE  FINANCING. 

Capital,  Bonds  and  Stocks.  Transferring  An  Established 

Capitalization  of  Corporations.  Business  to  a  Corporation. 

Raising  Additional  Capital. 

Capital,      The    questions    of    finance    are 

Bondsand 

Stocks.  among  the  most  difficult — if  not  the 

most  important — ^with  which  the  organizer  of  a 
business  corporation  has  to  deal,  and  like  other 
questions  of  business  policy,  they  are  necessarily 
governed  by  the  circumstances  of  the  undertak- 
ing in  hand. 

It  is  now  unnecessary  to  argue  the  importance 
of  financial  plans  and  precautions  in  the  organi- 
zation of  a  corporation  which  is  to  own  and  oper- 
ate an  important  industry,  or  where  the  same  is 
created  for  the  purpose  of  reorganization  of  an  es- 
tablished business;  the  discussion  that  follows 
deals  more  at  length  with  the  subject  of  what  is 
now  termed  *  *  Corporation  Finance ' '  and  particu- 
larly with  the  staple  securities  created  by  corpo- 
rate bodies. 

It  is  necessary  for  a  correct  understanding  of 
the  questions  of  Corporate  Financing  that  the  dis- 

45 


46  CORPORATE  FINANCING. 

tinction  between  the  terms  capital  stock,  shares  of 
stock  and  capital  be  understood.  At  the  same 
time,  an  understanding  of  the  nature  and  pecu- 
liar characteristics  of  stock  as  property  is  essen- 
tial. 

The  difference  between  the  capital  stock  and 
capital  of  a  corporation  is,  that  the  former  con- 
stitutes the  amount  divided  into  shares  or  parts 
at  which  the  incorporators  have  limited  the  is- 
suance of  stock — in  other  words,  the  amount  upon 
which  calls  may  be  made  upon  the  stockholders 
and  dividends  paid;  while  the  capital  of  a  cor- 
poration is  the  proceeds  of  the  sale  of  this  capital 
stock,  and,  in  addition  thereto,  all  money  or  prop- 
erty of  the  corporation  acquired  from  any  and 
all  lawful  sources.  The  former  amount  remains 
the  same  until  changed  by  consent  of  the  State, 
while  the  latter  may  vary  according  to  the  success 
of  the  enterprise. 

The  term  shares  of  stock  means  the  seveMi 
parts  into  which  the  capital  stock  is  divided,  e.  g.f 
if  the  capital  stock  of  a  corporation  is  $100,000, 
and  the  denomination  of  the  shares  is  fixed  at  $100 
each,  a  share  of  stock  represents  one  one-thou- 
sandth interest  in  the  corporation.  Then  these 
shares  of  stock  are  represented  by  stock  certifi- 
cates, which  may  be  made  out  to  represent  one, 
or  any  number  of  shares  of  the  capital  stock,  ac- 
cording to  the  will  of  the  makers  of  the  certificates. 


COBPOBATE  FINANCING.  47 

The  proceeds  of  the  sale  of  the  capital  stock — • 
the  capital — belongs  to  the  corporation,  and  the 
owners  of  such  capital  stock  have  no  right  to  with- 
draw any  part  of  such  proceeds  after  it  is  once 
paid  into  the  treasury;  and  this  is  the  law,  even 
if  all  the  capital  stock  is  owned  and  held  by  one 
individual.  As  heretofore  stated,  the  corporation 
is  a  legal  entity — a  person  in  the  eyes  of  the  law — 
and  the  stockholders,  directors  and  officers  com- 
bined do  not  constitute  the  corporation.  A  stock- 
holder, by  reason  of  his  owning  stock  in  a  cor- 
poration, does  not  thereby  acquire  title  or  right 
to  the  profits  or  surplus  of  a  corporation,  until  the 
same  has  been  formally  and  legally  *' declared'* 
by  the  Board  of  Directors  and  formally  set  apart 
for  the  stockholders;  at  the  same  time,  a  stock- 
holder has  no  title  or  individual  interest  in,  or 
rights  to,  the  property  of  a  corporation  until  a 
dissolution  takes  place.  He  cannot  even  acquire 
a  good  title  to  the  property  of  a  corporation  by 
purchasing  all  of  its  stock  and  then  abandoning 
the  corporate  existence. 

There  are  but  two  general  classes  of  stock  in  a 
business  corporation  which  need  be  here  referred 
to,  namely,  common  and  preferred.  Many  writers 
on  Corporation  Finance  give  other  classifications, 
such  as  ** Watered  Stock,''  ** Over-issued  Stock," 
'^Deferred  Stock,"  etc.,  but  they  all  fall  within 
the  above  classification,  or  are  of  no  importance 


48  CORPORATE  FINANCING. 

in  this  connection,  except  to  understand  the  mean- 
ing of  the  terms  employed. 

**  Watered  stock  ^'  means  simply  stock  that  has 
been  issued  and  not  paid  for,  in  money  or  money's 
worth,  to  the  extent  of  the  face  value  of  the  stock 
issued;  ** over-issued  stock'' — as  its  name  implies 
— is  stock  that  is  issued  in  excess  of  that  author- 
ized by  law,  or  for  which. the  corporation  was 
originally  capitalized;  and  the  term  *' deferred 
stock"  is  a  class  practically  unknown  in  this  coun- 
try, but  it  is  created  and  authorized  by  the  laws 
of  England,  and  often  issued  to  promoters.  The 
terms  upon  which  such  deferred  stock  is  issued 
vary,  but  usually  the  dividends  are  deferred  to 
the  payment  upon  all  other  classes  of  stock  issued 
and  outstanding. 

Common  stock  is  a  general  interest  in  common 
in  the  property  of  a  corporation.  It  is,  like  all 
other  stock,  divided  into  parts  or  shares  which 
represent  a  certain  proportionate  part  of  the 
whole.  This  class  of  stock  confers  equal  rights 
and  privileges  among  all  its  owners,  such  as  the 
right  to  share  in  the  profits  of  the  business;  to 
vote  for  directors ;  and  upon  a  dissolution  of  the 
corporation,  to  share  equally  with  all  other  stock- 
holders, in  the  division  of  the  assets,  etc. 

Preferred  stock  is  a  special  interest  and  con- 
tract combined  whereby  the  corporation  agrees 
to  pay  its  owners  a  certain  specified  dividend  out 


CORPOKATE  FINANCING.  49 

of  the  net  profits  of  the  business  in  advance  and 
in  preference  to  the  common  stockholders. 

It  may  not  be  amiss  to  here  refer  to  some  of 
the  important  differences  between  preferred  and 
common  stock.  The  former  provides  for  a  guar- 
anteed dividend  out  of  the  net  profits,  usually  the 
customary  rate  of  interest  of  the  State  where  the 
corporation  is  organized.  Such  dividends  can  be 
made  cumulative  or  non-cumulative;  that  is, 
should  the  net  profits  for  any  one  year  be  insuf- 
ficient to  pay  the  dividend  provided  for  cumula- 
tive preferred  stock,  any  unpaid  portion  of  such 
dividend  must  be  made  up  and  paid  out  of  the 
profits  of  any  subsequent  year,  before  dividends 
can  be  applied  to  the  common  stock,  or  any  other 
class,  and  where  such  preferred  stock  is  not  made 
cumulative,  this  assurance  of  back  dividends  is 
absent. 

Common  stock  has  no  guaranty  of  dividends, 
even  if  there  should  be  net  profits,  but  is  entitled 
to  all  of  the  earnings  of  the  company  after  the 
dividend  is  paid  on  the  preferred  stock;  and  un- 
less the  conditions  of  the  preferred  stock  are  such 
as  to  prevent,  it  will  pro-rate  with  the  common 
stock  in  all  dividends  that  may  be  earned  and 
declared,  after  the  dividend  has  been  paid  on  the 
preferred  stock,  and  an  equal  amound  paid  to 
the  holders  of  the  common  stock. 

The  conditions  upon  which  preferred  stock  is 


50  CORPORATE  FINANCING. 

issued  govern  all  the  rights  of  its  holders,  and 
constitute  a  contract  between  the  corporation  and 
the  holder;  and  in  the  absence  of  a  condition  to 
the  contrary,  preferred  stockholders  may  vote 
and  exercise  all  the  rights  of  the  holders  of  the 
common  stock. 

Some  of  the  State  statutes  do  not  provide  for 
the  issuing  of  preferred  stock,  but  it  has  been 
repeatedly  held  that  such  stock  may,  nevertheless, 
be  issued  if  it  is  provided  for  at  the  time  of  or- 
ganization ;  and  such  preferred  stock  may  also  be 
issued  at  any  time  thereafter,  with  the  consent  of 
the  holders  of  all  the  common  stock  of  the  cor- 
poration. 

A  Stock  Certificate  is  not  necessary  to  the  own- 
ership of  stock  in  a  corporation.  It  is  merely 
evidence  of  the  ownership;  the  stock  exists  inde- 
pendently of  the  certificate  itself. 

Shares  of  stock  are  a  rather  peculiar  species  of 
property.  They  are  intangible,  and  resemble  what 
is  termed  in  law  a  chose  in  action — ^that  is,  a  right 
or  claim,  which  can  be  reduced  to  writing,  and 
enforced  in  a  court  of  law. 

Shares  of  stock  are,  in  the  absence  of  a  statute 
expressly  authorizing  the  same,  not  subject  to  levy 
and  sale  upon  execution,  like  other  personal  prop- 
erty; however,  most  of  the  States  have  enacted 
laws  whereby  such  levy  may  be  made.  It  is  ne- 
cessary to  follow  such  statutes  strictly  in  order  to 


CORPOKATE  FINANCING.  51 

divest  the  record  holder  of  stock  of  his  title  by 
attachment ;  and  it  has  been  decided  that  attempt- 
ing to  reach  the  interest  of  a  stockholder  by  gar- 
nisheeing  the  corporation  is  ineffectual,  which 
demonstrates  the  principle  above  stated  that  this 
species  of  property  is  somewhat  peculiar,  and 
differs  from  a  claim  for  money  or  property,  in 
that  particular  at  least. 

Then,  in  addition,  shares  of  stock  possess  many 
features  of  negotiability.  For  instance,  by  simply 
indorsing  the  certificate  in  blank,  stock  may  be 
transferred  from  one  individual  to  another  by 
delivery  of  the  certificate ;  and  the  right  to  insert 
the  name  of  any  intermediate  or  ultimate  owner, 
and  to  have  the  stock  transferred  to  such  owner 
upon  the  books  of  the  company,  passes  with  the 
certificate  indorsed  in  that  way — ^whujh  enables 
the  possessor  of  this  species  of  property  to  readily 
use  the  same  as  security  for  financial  accommo- 
dation. 

Bonds  are  formal  obligations  executed  by  a 
corporation  and  usually  secured  by  trust  deed 
upon  the  plant  or  assets  of  the  company.  They 
are  ordinarily  issued  in  denominations  of  a  size 
that  will  enable  the  corporation  to  negotiate  a 
large  loan  among  a  number  of  investors,  and  to 
secure  alike  any  number  of  holders  of  such  obli- 
gations. 

The  terms  of  payment  and  security  underlying 


52  CORPORATE  FINANCING. 

an  issue  of  bonds  are  wholly  dependent  upon  the 
will  of  the  corporation  creating  them.  The  usual 
object  of  issuing  this  form  of  obligation  is  to 
obtain  what  is  termed  a  *^ permanent  loan/*  or 
financial  accommodation  for  a  long  time,  and  upon 
a  low  rate  of  interest,  in  order  that  the  same  may 
be  used  for  the  advancement  of  the  business,  and 
to  be  repaid  out  of  the  future  profits  of  the  enter- 
prise. 

It  is  customary  to  make  such  obligations  pay- 
able to  the  bearer;  and  when  this  is  done,  they 
are  susceptible  of  being  transmitted  from  one  per- 
son to  another  without  formality  of  any  kind.  The 
law  presumes  ownership  with  their  possession, 
when  made  in  that  way. 

The  conditions  of  a  trust  deed  made  to  secure 
such  bonds,  as  well  as  the  terms  of  the  bonds 
themselves,  may  be  made  to  facilitate  or  hinder 
their  sale ;  consequently  great  care  is  necessary  in 
the  preparation  of  both. 

Bonds  may  be  drawn  so  as  to  be  convertible  into 
stock,  at  the  option  of  the  holder,  and  in  this  way 
facilitate  their  sale,  by  enabling  the  owner  to 
practically  invest  in  the  enterprise,  and  in  case 
of  success,  to  convert  his  bond  holdings  into 
stock.  And  on  the  other  hand,  if  the  venture 
proves  less  profitable  as  an  investment  than  the 
interest  guaranteed  by  the  bonds,  the  holder  is 


CORPORATE  FINANCING.  53 

secured,  and  can  ultimately  recover  his  invest- 
ment, with  interest. 

Bonds  may  also  be  issued  in  payment  of  divi- 
dends; by  so  doing,  the  amount  of  the  dividend 
may  be  retained  in  the  business  for  development 
purposes,  and  the  stockholders  will  have  received 
what  is  equivalent  to  the  dividend  as  well. 

The  foregoing  simply  explains  the  latitude  and 
some  of  the  advantages  afforded  the  creator  of 
bonds  and  stocks.  The  terms  that  may  be  incor- 
porated in  stock  certificates  and  industrial  bonds 
and  in  the  trust  deed  given  for  their  security, 
are  always  a  subject  of  contract  between  the  cor- 
poration and  the  purchaser;  such  terms  are 
limited  only  by  general  rules  of  law  and  business 
expediency. 

The  term  debenture  is  often  used  interchange- 
ably with,  or  substituted  for,  the  word  bond.  While 
the  meaning  of  the  term  debenture  is,  strictly 
speaking,  the  evidence  of  an  existing  debt,  it  may 
be  a  simple  debt,  and  usually  unsecured ;  this  class 
of  security  is  not  popular  in  the  United  States, 
except  for  certain  rather  unusual  purposes.  Com- 
mon usage  has  established  many  qualifications  to 
the  word  bond,  and  they  are  approved  in  the  world 
of  finance,  and  their  meaning  and  significance 
understood ;  but  such  instruments  are  usually  ap- 
plicable only  to  railroads  and  similar  institutions 
for  their  financing. 


54  COEPORATE  FINANCING. 

Capital-      It  is  comparatively  a  simple  mat- 

ization.  of  Cor- 
porations, ter  to  determine  the  questions  relat- 
ing to  capitalization  where  the  number  of  parties 
in  interest  are  few,  or  in  a  case  where  the  busi- 
ness to  be  capitalized  is  what  is  termed  a  **  close 
corporation.''  In  such  cases  the  objects  to  be 
accomplished  are  usually  confined  to  the  conduct 
of  a  single  business  venture  for  the  benefit  of  a 
limited  number  of  persons,  and  the  questions  that 
arise  under  other,  and  ordinary  circumstances, 
are  absent.  It  is,  therefore,  unnecessary  to  dis- 
cuss the  capitalization  of  such  a  corporation  as  is 
here  alluded  to,  for  it  is  presumed  that  no  outside 
assistance  or  interest  will  be  desired. 

It  is  where  the  rights  of  the  parties  are  to  be 
considered  at  the  time  of  organization — ^in  order 
that  they  may  be  protected  under  present  condi- 
tions and  future  business  developments,  and  that 
the  needs  of  a  business  may  be  provided  for  at 
the  time  of  organization,  as  well  as  in  the  future — 
that  this  subject  requires  special  attention. 

A  business  with  a  good  foundation  and  pros- 
pects may  be  greatly  handicapped,  and  its  oppor- 
tunities for  successful  promotion  literally 
'* killed,''  by  over-capitalization.  For  example,  A 
had  a  valuable  patented  device  that  was  in  itself, 
the  foundation  for  a  successful  business  venture. 
He  formed  a  corporation  and  capitalized  it  at 
$2,000,000,  when  as  a  matter  of  fact,  $100,000  was 


COKPOKATE  FINANCING.  55 

all  the  working  capital  which  was  necessary  for 
the  successful  conduct  of  the  business. 

By  manipulations,  hereinafter  more  fully  ex- 
plained, the  business  was  so  arranged  as  to  offer 
this  stock  at  a  ridiculous  figure  (below  par,  of 
course),  with  the  result  that  after  disposing  of  a 
certain  amount  of  this  stock — enough  to  get  the 
business  thoroughly  entangled,  and  to  demonstrate 
that  such  a  plan  was  not  feasible,  and  that  suffi- 
cient money  could  not  be  raised  thereby  to  ex- 
ploit the  device  and  promote  the  business — it  be- 
came necessary  to  reorganize  the  company,  and 
to  re-capitalize  it  at  a  reasonable  amount,  before 
the  business  could  be  financed  sufficiently  to  dem- 
onstrate the  earning  capacity  of  the  device. 

Numerous  other  cases  illustrating  the  principle 
above  set  forth  could  be  given,  but  they  are  of 
such  frequent  occurrence  as  to  be  familiar  to  al- 
most everyone. 

At  the  same  time,  the  capitalization  of  a  busi- 
ness corporation  at  an  amount  less  than  the  im- 
mediate or  future  prospective  requirements  of 
the  business  will  admit,  may,  and  usually  does, 
furnish  an  occasion  for  reorganization.  "What 
may  be  considered  sufficient  capital  for  present 
needs  may  prove  wholly  inadequate  after  the  bus- 
iness has  been  developed,  and  unless  this  con- 
tingency has  been  taken  into  account  at  the  time 
of  organization  the  providing  of  additional  capital 


56  COEPOEATE  FINANCING. 

is  always  a  difficult  question ;  for  the  rights  of  the 
stockholders  will  have  accrued  in  the  meantime, 
and  their  consent  to  such  an  object  may  be  neces- 
sary and  difficult  to  obtain. 

Under  the  laws  of  Illinois  (and  most  other 
States)  it  is  necessary  to  obtain  the  consent  of 
stockholders  owning  two-thirds  of  the  capital 
stock  before  an  increase  of  the  same  can  be  legally 
accomplished;  and  unless  the  amount  of  capitali- 
zation at  the  time  of  organization  is  sufficient  to 
provide  for  the  future  needs  of  a  business  the 
absence  of  this  consent  may  defeat  the  raising  of 
such  needed  capital,  in  that  way. 

There  is,  of  course,  no  arbitrary  or  settled  rule 
for  fixing  the  amount  of  capitalization  of  a  busi- 
ness corporation,  but  the  effectual  and  conserva- 
tive rule  usually  adopted  for  the  guidance  of 
incorporators  is  that  the  demonstrated  or  reason- 
ably prospective  earning  capacity  of  a  business 
should  control  in  fixing  the  amount.  If  the  ques- 
tion arises  in  the  reorganization  of  a  going  busi- 
ness, its  past  record  and  reasonable  future  pros- 
pects based  thereon,  are  legitimate  subjects  for 
consideration  and  guidance  in  fixing  the  capitali- 
zation. As  an  illustration :  Where  a  business  has 
shown  a  net  profit  of  15%  on  the  capital  employed, 
it  would  not  be  out  of  proportion  to  capitalize  a 
corporation,  which  was  to  operate  such  a  busi- 
ness in  the  future,  at  three  times  the  amount  form- 


CORPORATE  FINANCING.  57 

erly  invested  therein.  On  the  other  hand,  if  the 
proposition  under  consideration  is  a  wholly  new 
business  venture,  its  present  and  conservatively 
estimated  future  prospects  should  form  the  basis 
of  capitalization ;  and  these  prospects  may  be  ar- 
rived at  by  various  methods  usually  known  to 
those  experienced  in  the  particular  line  of  busi- 
ness under  consideration. 

There  are  usually  but  two  important  considera- 
tions in  fixing  the  capitalization  of  a  corporation, 
and  they  are,  first,  to  enable  the  company  to  ob- 
tain working  capital;  and  second,  to  protect  the 
rights  of  the  present  parties  in  interest.  In  ac- 
complishing the  former,  due  regard  should  be  en- 
tertained for  the  opinions  and  judgment  of  those 
who  may  be  invited  to  invest  in  the  undertaking. 

The  manner  of  capitalizing  a  corporation,  that 
is  in  fixing  the  par  value  as  well  as  the  classifica- 
tion of  stock  to  be  issued — ^whether  preferred  or 
common,  or  both — is  also  important,  and  this 
should  be  done  at  the  time  of  organization,  as  far 
as  possible,  for  reasons  already  alluded  to.  As  to 
the  par  value  of  stock,  recent  instructors  and 
writers  have  advocated  the  omission  of  any 
fixed  amount  in  describing  the  value  of  shares 
to  be  issued;  but  such  an  innovation  has  not 
met  with  favor  among  financiers  or  those  who 
have  to  do  with  actual  financial  necessities.  It 
is  usually  unwise  and  unnecessary  to  fix  the  par 


58  CORPOBATE  FINANCING. 

value  of  shares  of  stock  at  less  than  $100  each, 
except  in  mining  industries,  where  a  smaller  unit 
of  value  is  customary  if  not  necessary. 

In  the  reorganization  of  a  corporation  or  busi- 
ness it  is  frequently  desirable  that  the  former 
owners  of  the  business  should  continue  to  be  in- 
terested in  the  enterprise,  by  accepting  stocks  or 
bonds,  or  both,  in  payment  for  their  interest  con- 
veyed to  the  corporation.  This  may  be  accom- 
plished by  issuing  preferred  stock  to  cover  all  the 
interest  of  such  persons,  or  to  issue  bonds  to  cover 
the  conservative  value  of  the  tangible  property, 
and  common  stock  in  payment  of  the  Good  Will 
and  other  intangible  assets  conveyed.  If,  on  the 
other  hand,  it  is  the  desire  of  those  interested  to 
ultimately  dispose  of  their  holdings  entirely  (in 
other  words,  to  incorporate  for  the  purpose  of  dis- 
posing of  their  business),  this  may  be  accom- 
plished through  the  bond  issue,  or  by  the  issuing 
of  preferred  stock  which  is  preferred  as  to  the 
assets  as  well  as  to  profits;  for  they  are  both  more 
likely  to  find  a  ready  sale  than  common  stock,  par- 
ticularly while  the  enterprise  is  in  its  infancy. 

The  question  of  whether  the  interest  conveyed 
shall  be  paid  in  preferred  stock  or  bonds  is  simply 
one  of  expediency;  in  either  event,  the  party  in- 
terested is  protected.  The  principal  and  controll- 
ing difference  between  preferred  stock  (such  as  is 
here  suggested)  and  bonds  secured  by  a  trust  deed 


CORPORATE  FINANCING.  59 

on  the  plant  of  an  established  business^  is  that  the 
bonds  secure  the  holder  ahead  of  subsequent  cred- 
itors and  guarantee  the  payment  of  a  certain  rate 
of  interest,  while  the  preferred  stock  does  not  in- 
sure a  dividend  unless  it  is  earned,  and  is  not  a 
lien  on  the  assets;  and  with  these  differences, 
they  may  be  considered  as  of  equal  value  and  se- 
curity. If  the  business  management  and  condi- 
tions justify  the  accepting  of  preferred  stock  of 
this  character,  it  is  frequently  desirable  to  do  so 
in  preference  to  issuing  bonds;  for  with  such  pre- 
ferred stock  there  is  no  indebtedness  against  the 
business  to  injure  its  credit  and  prospects,  which 
would  be  the  case  if  a  bond  issue  was  adopted. 

The  capitalization  of  a  new  venture  without  a 
nucleus  or  established  business  as  a  basis,  an(^ 
where  the  organizers  depend  upon  the  sale  of 
stock  for  working  capital,  presents  more  difficul- 
ties. 

Ordinarily,  there  are  a  number  of  persons  in- 
terested in  such  undertaking  at  the  time  of  or- 
ganization who  propose  to  contribute  a  certain 
amount  toward  its  promotion  and  establishment 
but  expect  to  raise  the  majority  of  the  capital  by 
the  sale  of  stock. 

Where  such  a  condition  exists,  it  is  advisable  to 
have  both  preferred  and  common  stock,  the  pro- 
portion of  which  must  depend  upon  the  circum- 
stances of  the  particular  case  in  hand.     An  ap- 


60  CORPORATE  FINANCING. 

proved  and  demonstrated  plan,  however,  is  to  have 
the  stock  divided  equally;  that  is,  one-half  pre- 
ferred and  one-half  eonunon,  and  to  capitalize  the 
corporation  at  an  amount  sufficient  to  make  the 
proceeds  from  the  sale  of  the  preferred  stock  fur- 
nish the  immediate  working  capital,  and  to  leave 
the  common  stock  for  sale  for  future  development 
purposes,  after  its  earning  capacity  has  been  dem- 
onstrated ;  or  if  it  is  feasible  to  do  so,  have  the  pre- 
ferred stock  cumulative  as  to  dividends,  and 
preferred  as  to  assets,  and  to  sell  as  nearly  as  pos- 
sible an  equal  proportion  of  each  class  of  stock  at 
the  outset  In  this  way,  the  investor  is  insured 
a  dividend  on  one-half  his  investment,  if  the 
business  earns  enough  to  pay  it ;  and  in  the  event 
of  a  dissolution  or  failure,  he  would  be  protected 
ahead  of  common  stockholders  in  the  same  pro- 
portion. Then  enough  of  this  preferred  stock 
would  be  retained  to  aid  the  sale  of  the  common 
stock,  should  the  business  require  it. 

There  are  numbers  of  circumstances  which  per- 
mit of  the  issuing  of  all  common  stock,  particu- 
larly among  the  smaller  undertakings,  and  of 
course  this  is  to  be  recommended  whenever  the 
conditions  will  justify  such  a  course — that  is, 
when  the  capital  necessary  for  the  needs  of  the 
business  can  be  as  readily  obtained  in  that  way. 

After  the  amount  and  manner  of  capitalization 
of  a  business  corporation  has  been  determined 


CORPORATE  FINANCING.  61 

there  still  remain  for  consideration  the  terms  and 
manner  of  payment  of  the  stock  sold  or  subscribed 
for. 

The  statutes  of  most  of  the  States  provide  for 
a  certain  minimum  amount  with  which  a  corpora- 
tion may  begin  business,  and  this,  of  course,  must 
be  paid  in  at  the  time  of  organization.  In  the  ab- 
sence of  a  statute  to  the  contrary,  the  payment 
for  all  stock  in  a  corporation  is  a  fit  subject  of 
contract  (as  between  the  subscriber  and  corpora- 
tion), and  in  the  absence  of  any  contract  such 
payment  is  subject  to  call  of  the  Board  of  Direc- 
tors. 

In  a  case  where  it  is  necessary  to  sell  stock  to 
be  paid  for  in  installments,  or  to  sell  stock  in 
small  blocks  or  installments,  the  approved  method 
for  accomplishing  this  purpose  is  to  issue  an  *  in- 
stallment certificate'^  or  contract  for  the  ultimate 
delivery  of  the  regular  stock  certificate  upon  com- 
plete payment,  or  when  a  certain  number  of  shares 
shall  have  been  paid  for,  etc.  Where  it  is  neces- 
sary to  adopt  such  methods  for  the  raising  of 
capital,  it  is  usually  advisable  to  issue  such  con- 
tracts in  lieu  of  stock,  and  to  have  their  terms 
provide  for  the  delivery  of  the  regular  stock  cer- 
tificates upon  a  certain  specified  date,  far  enough 
in  the  future  to  insure  the  sale  of  all  stock  which 
it  is  contemplated  will  be  sold,  or  which  it  is 
deemed  necessary  to  sell,  in  that  way.    For,  if  the 


62  COKPORATE  FINANCING. 

regular  stock  certificates  are  delivered  as  the 
stock  is  sold,  circumstances  may  make  it  neces- 
sary or  profitable  for  the  purchasers  to  dispose 
of  some  or  all  of  their  stock  before  the  company's 
unissued  stock  is  sold,  and  in  this  way  create  a 
competition  between  such  stockholders  and  the 
corporation,  and,  in  consequence,  demoralize  the 
market  and  hinder  the  sale  of  the  balance  of  the 
company's  stock. 

Such  a  certificate  as  is  here  alluded  to  must 
be  drawn  with  special  reference  to  each  particu- 
lar state  of  facts.  An  approved  general  form  il- 
lustrating the  application  of  the  plan  here  re- 
ferred to  will  be  found  in  the  Appendix.* 

Recurring  to  the  subject  of  bonds :  Their  terms 
and  conditions,  and  the  terms  and  conditions  of 
the  trust  deed  made  for  their  security,  are  mat- 
ters of  importance  from  a  practical  standpoint, 
both  to  the  corporation  issuing  them  and  to  the 
prospective  purchaser  in  the  open  market. 

While  it  is  necessary  that  these  provisions 
should  be  all  that  is  reasonably  required  for  the 
protection  of  the  investor,  care  should  be  exer- 
cised in  making  their  terms  to  suit  the  conveni- 
ence and  possible  contingencies  of  the  business  of 
the  corporation;  as  an  example,  in  the  terms  of 
their  payment  it  may  be  provided  that  any  of  a 
certain  series  of  bonds  may  be  retired  by  the  cor- 

*  Appendix,  page  250. 


CORPORATE  FINANCING.  63 

poration  upon  giving  reasonable  notice  to  that  ef- 
fect upon  any  annual  interest  day,  and  by  paying  a 
certain  reasonable  amount  for  the  privilege,  in  the 
shape  of  advance  interest.  In  addition,  the  de- 
nomination and  time  of  payment  should  be  con- 
sidered. If  it  is  desired  to  sell  such  bonds  in  a 
private  way,  or  in  a  locality  wherein  the  persons 
interested  are  known,  the  making  of  small  de- 
nominations may  greatly  facilitate  their  sale 
among  small  investors ;  and  the  time  of  payment 
should  be  placed  at  a  conservative  distance  in  the 
future  to  insure  the  ability  of  the  company  to  re- 
pay the  principal  when  due. 

It  is  often  advisable  and  necessary  that  the 
stocks  and  bonds  of  a  corporation  should  be  listed 
with  the  local  Stock  Exchange,  in  order  that  they 
may  have  a  market  among  investors  in  securities, 
who  naturally  look  to  such  a  source  for  informa- 
tion concerning  the  value  and  regularity  of  the 
issue  offered  for  sale. 

Such  Exchanges  have  rules  for  the  protection 
of  their  members  and  the  public  which  must  be 
complied  with ;  a  copy  of  that  portion  of  the  By- 
Laws  of  the  Chicago  Stock  Exchange  is  given  in 
the  Appendix,*  and  the  conditions  there  imposed 
are  similar  in  all  respects  to  those  of  such  Ex- 
changes in  other  cities. 

*  Page  281. 


64  CORPORATE  FINANCING. 

Raising  A  d-      Accordiiig  to  the  last  official  cen- 

ditional     Capi-  •       ji  •    i  i 

tai.  sus,  there  are  now  m  the  neighbor- 

hood of  two  hundred  and  seventy-five  thousand 
manufacturing  industries  in  the  United  States 
which  employ  over  seven  million  persons.  Six 
and  three-tenths  per  cent  of  those  connected  with 
such  industries  are  proprietors  and  officials  who 
derive  their  profit  and  income  from  the  labor  and 
efforts  of  the  remaining  ninety-three  and  seven- 
tenths  per  cent  of  the  aforesaid  seven  million, 
and  this  class  is  constantly  increasing  in  a  country 
like  America. 

The  **easy  road''  is  the  popular  highway  to  a 
livelihood  as  well  as  to  any  other  end,  and  the 
natural  ambition  of  the  worthy  members  of  the 
employed  class  is  that  they  shall  acquire  the  nec- 
essary education,  training  and  capital  to  fit 
them  for  a  position  among  the  aforesaid  pro- 
prietors, officials,  etc. ;  but  unfortunately  the  prin- 
cipal wealth  of  this  world  is  in  the  possession  of 
a  very  limited  number,  and  in  consequence  the 
vast  majority  of  these  (as  well  as  all  other)  am- 
bitious individuals  are  ever  in  search  of  additional 
capital  with  which  to  put  into  execution  the  vari- 
ous and  sundry  plans  that  appeal  to  them  from 
time  to  time  as  being  almost  certain  roads  to 
wealth  and  power. 

If  one  were  to  canvass  the  entire  business  world 
in  search  of  a  chance  for  investment  that — in^  the 


CORPORATE  FINANCING.  65 

judgment  of  the  ** other  fellow'' — was  not  sound 
and  promising,  it  is  believed  that  such  an  effort 
would  not  be  rewarded  with  a  single  example. 

If  the  glowing  descriptions  of  the  numerous 
^^ business  opportunities''  constantly  appearing  in 
the  daily  press  were  only  half  true,  every  pos- 
sessor of  but  a  few  hundred  dollars  need  look  no 
further  than  that  source  for  certain  affluence  and 
important  position. 

But  it  is  unfortunately  true  that  the  vast  ma- 
jority of  business  and  financial  opportunities  thus 
offered,  seldom  amount  to  more  than  object  lessons 
for  the  discriminating,  and  sad  experiences  for  the 
credulous  or  unsophisticated. 

The  men  who  live  by  their  wits  are  ever  ready 
to  see  opportunities  and  demands  that  are  not 
fully  supplied  in  the  regular  recognized  chan- 
nels of  business ;  and  here  is  truly  an  opportunity 
that  has  engaged  the  attention  of  some  of  the 
crudest,  as  well  as  the  most  clever  operators 
among  men. 

It  is  the  knowledge  that  ambitious  and  earnest 
humanity  is  ever  seeking  for  capital  to  exploit 
their  projects,  that  prompts  the  criminal  to  in- 
vent the  numerous  devices  which  he  has  employed 
to  impose  upon  the  inexperienced. 

What  is  more  alluring  or  attractive  than  the 
assurance  that  sufficient  real  money  can  be  sup- 
plied to  finance  one's  business  undertaking,  and 


66  COEPORATE  FINANCING. 

this  regardless  of  everything,  excepting  only  a 
small  deposit  or  fee  to  cover  some  trifling  pre- 
liminary expense  or  formality,  that  is  made  to  ap- 
pear sufficiently  reasonable. 

The  law  reports  of  every  state  contain  accounts 
of  more  or  less  adroit  schemes  and  artifices  that 
have  been  used  to  separate  the  man  in  search  of 
capital  from  the  money  he  already  possesses,  and 
the  wonder  is  that  the  most  of  the  apparently  mod- 
ern schemes  are  simple  repetitions  of  time-honored 
and  familiar  devices  that  have  served  their  pur- 
poses in  almost  numberless  instances  in  the  past, 
and  would,  therefore,  seem  to  be  too  familiar  to 
again  be  productive  of  results. 

The  following  is  taken  verbatim  (with  names 
and  irrelevant  matter  omitted)  from  one  of  our 
reported  cases,*  and  is  here  inserted  to  justify  (if 
necessary),  the  foregoing  statements. 

A,  *^  was  a  clergyman,  residing  at .    He 

was  an  officer  in  a  corporation  owning  lead  and 
zinc  mines  near  Joplin,  Missouri.  Representing 
the  corporation,  he  desired  to  sell  these  mines  for 
the  sum  of  $50,000.  Upon  the  recommendation 
of  an  acquaintance,  early  in  1905,  he  wrote  to  B, 
who  was,  or  pretended  to  be,  an  investment  broker, 
doing  business  at  Street,  Chicago,  Ill- 
inois. A,  by  the  letter,  made  certain  statements 
in  regard  to  the  mines  and  inquired  whether  B 

*  233  ni.  560. 


COKPORATE  FINANCING.  67 

would  undertake  to  sell  them.  B  replied,  saying 
that  he  dealt  only  in  guaranteed  securities;  that 
if  the  corporation  would  issue  debenture  bonds 
for  $50,000,  due  in  thirty  years  and  drawing  inter- 
est at  six  per  cent  per  annum,  and  have  them  guar- 
anteed by  a  guaranty  and  trust  company,  he  could 
effect  a  sale  of  the  bonds  at  par  within  sixty  days. 
He  also  stated  that  the  guaranty  policy  would 
cost  one  per  cent  of  the  amount  of  the  bonds,  or 
$500;  that  his  commission  for  effecting  the  sale 
would  be  $2,500,  and  that  the  guaranty  company 
would  require  that  about  $15,000  of  the  proceeds 
of  the  bonds  be  deposited  with  it,  to  be  invested  by 
it  to  meet  the  principal  of  the  bonds  when  they 
matured.  Various  letters  passed  back  and  forth 
between  A  and  B,  until  the  25th  of  April,  1905, 
when  B  wrote  A,  stating  that  if  immediate  appli- 
cation was  made  to  a  guaranty  company  for  a  pol- 
icy warranting  the  bonds  he  could  get  the  policy 
in  time  to  enable  him  to  market  the  bonds  before 
the  first  of  next  July,  and  that  if  he  failed  to  do  so 
he  would  return  the  $500  paid  for  the  policy.  He 
enclosed  a  blank  application  for  the  policy  in  the 
letter,  and  told  A  either  to  act  upon  that  letter  or 
drop  the  matter  entirely.  A  filled  up  and  signed 
the  application.  He  also  obtained  from  his  bank 
a  draft  or  bill  of  exchange  for  $500,  payable  to 

his  own  order  and  drawn  upon  the Loan 

and  Trust  Company,  of  Chicago,  Illinois.  By  en- 


^8  CORPOEATE  FINANCING. 

dorsement  on  the  back  thereof,  A  made  the  same 

payable  to  the  order  of  N Underwriting 

and  Trust  Company  of  ,  the  guaranty 

company  to  which  the  application  was  addressed. 
The  bill  of  exchange  was  *  *  *  enclosed  in  a  let- 
ter of  the  same  date  from  A  to  B,  with  the  appli- 
cation for  a  policy  in  the  underwriting  company. 

*  *  *  B  had  selected  the  guaranty  company  to 
which  application  should  be  made,  and  A  made 
the  application  above  mentioned  in  accordance 
with  B's  written  directions. 

C  pretended  to  be  an  investment  broker  and  was 

the  agent  of  the Underwriting  and  Trust 

Company.  *  *  *  When  B  received  the  application 
and  the  accompanying  bill  of  exchange  by  mail, 

*  *  *  he  delivered  them  to  C,  who  endorsed  the  bill 

in  the  name  of  the  Underwriting  and 

Trust  Company,  by  himself,  as  agent,  and  col- 
lected the  same.  On  the  same  day,  C  in  error 
wrote  A,  acknowledging  the  receipt  of  the  draft 
and  application  for  a  guaranty  policy,  and  stating 
that  from  what  B  told  him,  there  could  be  no 
doubt  that  the  policy  would  issue.  Up  to  this 
time,  A  had  not  seen  B  nor  C,  but  the  matter  had 
been  carried  forward  solely  by  correspondence 
between  A  and  B.  After  this  time,  however,  both 
C  and  B  corresponded  with  A,  and  a  guaranty 
policy  was  sent  to  him,  which,  however,  did  not 
accord  with  the  application.    The  bonds  were  is- 


COBPORATE  FINANCING.  69 

sued  but  were  never  sold,  and  the  evidence  makes 
it  entirely  clear  that  B  never  intended  to  make 
any  effort  to  sell  them.  After  B  had  failed  to  sell 
the  bonds  by  July  1,  A  demanded  a  return  of  the 
$500,  but  was  unable  to  obtain  it.  C  and  B  con- 
tinued in  correspondence  with  A,  seeking  to  ex- 
plain the  delay  in  the  sale  of  the  bonds,  until  about 
March  1,  1906,  when  A  instituted  criminal  pro- 
ceedings against  them,  which  ultimately  resulted 
in  the  conviction.  *  *  *  »> 

It  would  seem  the  time  were  here  when  even 
the  most  indifferent  should  be  able  to  recognize  an 
absurd  proposition,  and  not  continue  to  encour- 
age a  class  of  shifty  humanity,  in  a  calling  that 
would  be  obsolete,  if  it  were  not  for  the  innumer- 
able opportunities  presented  and  often  virtually 
thrust  upon  them  by  such  seekers  after  capital. 

It  would  also  seem  that  the  subject  of  business 
financing  is  not  more  mysterious  or  incompre- 
hensible than  other  every-day  undertakings.  It 
certainly  should  not  be ;  yet  how  often  do  we  hear 
of  men  engaged  in  important  business  affairs  suf- 
fering substantial  losses  through  schemes  substan- 
tially of  their  own  creation  to  obtain  investors,  or 
what  is  equally  surprising,  being  influenced  by  the 
absurd  representations  and  undertakings  of  those 
who,  if  encountered  in  familiar  business  transac- 
tions, would  not  be  seriously  considered. 

Pilots  of  finance  in  undertakings  of  this  charac- 


70  CORPORATE  FINANCING. 

ter  exist  only  in  the  imagination  or  to  mislead ;  to 
be  sure,  there  are  a  few  reliable  brokers  in  every 
large  city  who  frequently  handle  unlisted  securi- 
ties, but  they  do  not  sell  kindergarten  creations 
nor  securities  that  have  not  a  well  known  or  as- 
certainable value. 

As  for  established  banks  and  like  financial  in- 
stitutions generally,  they  are  as  likely  to  be  in- 
terested in  legitimate  and  sound  offerings  as  any 
individual,  and  unless  the  opportunity  offered 
meets  the  requirements  and  approval  of  either  the 
legitimate  banker  or  broker,  the  would-be  financier 
can  be  of  no  service. 

The  business  enterprise  of  merit  which  is  prop- 
erly organized  and  has  complied  with  the  rules 
of  recognized  institutions  for  securing  capital, 
invariably  receives  all  the  consideration  it  is  en- 
titled to,  and  obtains  such  assistance  as  its  op- 
portunity warrants  when  properly  presented  by 
or  on  behalf  of  those  who  are  immediately  inter- 
ested and  identified  therewith ;  and  the  chief  quali- 
fication of  **an  outsider"  that  is  not  equally  pos- 
sessed by  the  intelligent  business  men  interested 
may  hem  the  preparation  and  actual  presentation 
of  a  business  opportunity. 

If  the  corporation  is  legally  formed  with  due 
consideration  for  its  possible  future  developments 
and  financial  needs,  and  the  business  has  been 
legitimately  and  successfully  conducted,  and  its 


CORPORATE  FINANCING.  71 

books  and  records  accurately  and  systematically 
kept,  the  question  of  raising  additional  capital  is 
comparatively  a  simple  one,  and  its  acquirement 
is  based  primarily  upon  the  financial  responsibility 
and  business  prospects  of  such  an  enterprise. 

Conditions  that  influence  sales  of  stocks  and 
bonds  are  often  created  at  the  time  of  the  organi- 
zation of  the  corporation  creating  them.  It  is 
when  some  or  all  of  the  foregoing  features  are 
lacking  that  difficulties  are  encountered  and  fail- 
ures occur,  where  the  business  itself  would  other- 
wise justify  a  different  result.  And,  it  might  be 
added,  that  the  majority  of  failures  are,  in  some 
measure,  at  least,  due  to  the  fact  that  the  proper 
attention  has  not  been  given  to  some  practical 
question  in  the  creation  of  the  securities  to  be  sold 
or  in  the  organization,  or  other  essential  matters, 
at  the  inception  of  the  undertaking.  When  the 
corporation  is  confronted  with  embarrassing  ques- 
tions of  finance,  the  defects,  if  any,  in  its  formation 
or  subsequent  conduct  *  *  stand  out  in  bold  relief, '  * 
and  often  make  it  quite  impossible  to  accomplish 
the  result  desired,  without  a  reorganization.* 

Capital  is  a  power  well  known  to  the  average 
possessor,  and  it  is  necessary  to  take  this  fact  into 
consideration  when  it  is  sought  after;  then,  the 
viewpoint  of  the  man  with  money  must  also  be 
taken  into  account.     While  there  are  many  sel- 

*  See  ' '  Reorganization, ' '  page  129. 


72  COKPORATE  FINANCING. 

fish  and  grasping  persons,  the  average  business 
man  looking  for  a  business  opportunity  is  fair  and 
reasonable  from  his  point  of  view ;  and  if  that  can 
be  ascertained,  and  his  requirements  fulfilled,  the 
matter  of  interesting  him  in  a  business  is  simpli- 
fied. 

The  business  corporations  which  are  ordinarily- 
seeking  capital  might  properly  be  included  within 
the  following  three  general  classifications,  and 
they  will  therefore  be  here  adopted,  and  consid- 
ered in  their  order,  namely: 

First:  The  new  undertaking  which  has  passed 
through  the  experimental  period  (which  is  usually 
the  first  year),  and  finds  itself  without  sufficient 
capital  to  accomplish  the  original  objects. 

Second:  The  established  business  which  has 
been  built  up  by  a  firm,  individual  or  retiring  cor- 
poration, and  transferred  to  a  new  corporation, 
but  for  some  reason  the  capital  at  its  disposal 
proves  insufficient. 

Third:  The  business  with  visionary  plans,  and 
whose  objects  are  impractical,  desiring  to  obtain 
capital  for  its  conduct  or  continued  operation. 

In  considering  the  first  class  of  enterprises 
named  it  will  be  assumed  that  all  necessary  and 
proper  steps  have  been  taken  in  the  organization, 
and  that  the  business  itself  is  of  recognized  merit. 
It  is  also  here  assumed  that  no  mistakes  had  been 
made,  either  in  the  domicil,  amount  of  capitaliza- 


CORPORATE  FINANCING.  73 

tion,  or  other  practical  features,  and  also,  that  the 
business  itself  shows  a  fair  and  reasonable  pros- 
pect for  ultimate  success. 

In  this  case,  as  in  all  others,  the  particular  cir- 
cumstances must  govern;  but  generally  the  in- 
creasing of  the  capital  stock  of  such  a  company  is 
the  most  satisfactory  method  to  acquire  addi- 
tional capital,  particularly  from  a  financial  stand- 
point. Of  course,  the  sale  of  such  stock  is  neces- 
sary, and  if  the  business  will  admit  of  additional 
executive  assistance,  the  inducement  to  an  investor 
of  filling  an  ofiice  of  responsibility — with  reason- 
able compensation — is  always  a  great  help  and  an 
important  element  in  effecting  such  a  sale. 

The  sale  of  a  large  issue  of  stock  is  always  dif- 
ficult, unless  the  corporation  is  well  known,  in 
the  hands  of  recognized  dealers  in  the  line  of 
business,  or  its  stock  is  listed  on  the  local  Stock 
Exchange. 

The  issuance  of  bonds  or  preferred  stock  with 
a  common  stock  bonus,  is  always  to  be  discour- 
aged from  a  business  standpoint,  if  from  no  other ; 
and  the  conservative  man  of  money  is  rarely,  if 
ever,  influenced  thereby. 

Many  of  the  questions  here  presented  have 
been  already  considered  in  determining  the  cap- 
italization of  a  new  corporation — ^under  the  pre- 
ceding heading — and  therefore  need  not  be  re- 
peated; the  general  principles  there  announced 


74  CORPORATE  FINANCING. 

will  be  found  useful  in  the  solution  of  questions 
of  finance  whenever  a  business  falling  within  this 
classification  requires  financial  assistance. 

The  next  class  of  business  corporations  seeking 
capital,  and  referred  to  above,  are  not  as  numer- 
ous as  the  first.  For,  assuming  that  no  mistakes 
have  been  made  in  the  essential  features  of  re- 
organization and  that  the  business  is  established, 
little  difficulty  should  be  met  in  raising  any  rea- 
sonable amount  of  necessary  capital  consistent 
with  the  security  to  be  given. 

Here  we  are  also  confronted  with  the  peculiar, 
important  circumstances  which  surround  every 
case  of  this  character.  Generally  such  a  business 
has  assets  of  a  permanent  nature — often  a  plant 
which  would  readily  be  accepted  as  ample  secur- 
ity for  a  bond  issue  sufficient  to  provide  the  neces- 
sary working  capital ;  and  where  this  can  be  done 
to  advantage,  it  is  well  to  be  considered,  as  such 
bonds  usually  are  salable  at  par,  and  bear  a  low 
rate  of  interest  and  can  be  made  to  mature  far 
enough  in  the  future  to  make  such  a  plan  advis- 
able from  every  standpoint. 

Then  the  question  of  changing  location  is  to 
be  considered  here,  as  it  is  in  the  class  of  com- 
panies first  above  named;  numerous  outlying 
towns  and  localities  desire  additional  manufac- 
turing industries,  and  they  are  frequently  pre- 
pared to  provide  locations  and  financial  assistance 


CORPORATE  FINANCING.  75 

either  in  the  form  of  a  bonus,  or  by  subscribing 
for  a  certain  amount  of  additional  capital  stock. 
These  opportunities  may  be  investigated,  and 
reliable  information  obtained  by  consulting  the 
Industrial  Agents  of  the  various  railroads,  whose 
business  it  is  to  give  assistance  in  such  matters, 
both  to  the  industry  seeking  a  location  and  to  the 
town  in  procuring  the  enterprise  desired.  Very 
frequently  in  the  reorganization  or  combination 
of  two  or  more  kindred  industries,  the  circum- 
stances will  justify  the  issuance  of  special  pre- 
ferred stock.  An  example  of  such  a  case  may  be 
found  illustrated  in  the  Appendix*  where  the 
formal  offering  there  shown  both  demonstrates 
the  method  to  pursue  in  setting  up  and  making  the 
necessary  showing  to  interest  capital,  and  the  ap- 
proved form  of  offering  the  stock  to  be  sold. 

The  third  class  of  enterprises  named  comprise 
the  majority  of  the  seekers  after  capital,  and  this 
fact  alone  makes  it  more  difficult  for  the  legitimate 
or  worthy  enterprises  to  secure  such  assistance. 

Manifestly,  the  greatest  benefit  to  all  persons 
interested  in  such  a  company  would  be  to  wind 
up  its  affairs  as  speedily  and  economically  as 
possible ;  but  it  is  safe  to  predict  that  few  readers 
of  this  book  will  ever  concede  that  their  under- 
takings or  business  ventures  fall  within  the  lines 
here  drawn. 

*  See  Appendix,  pages  229  and  234. 


76  CORPOKATE  FINANCING. 

It  is  surprising,  however,  to  know  the  large  per- 
centage of  enterprises  struggling  to  keep  alive  and 
going  which  in  reality  may  be  fairly  considered 
within  this  class. 

It  is  not  infrequent,  however,  for  the  lawyer  to 
be  called  upon  to  scrutinize  the  affairs  of  such 
enterprises,  and  he  should  be  qualified  and  ready 
to  advise  his  client,  not  alone  upon  the  legal  status 
of  affairs  but  upon  the  general  aspect  of  the  busi- 
ness and  its  prospects ;  and  this  he  may  do  by  sim- 
ply investigating  along  lines  that  are  well  defined. 
For  instance,  a  company  that  to  all  intents  and 
purposes  has  ** stock- j obbing' '  *  for  its  principal 
object  should  be  avoided  and  condemned;  a  com- 
pany organized  for  the  purpose  of  conducting 
some  speculative  venture  at  a  great  distance  is 
suspicious ;  a  business  with  vast  natural  resources 
wanting  **a  small  amount  of  money  for  develop- 
ment purposes,"  which  should  readily  be  obtained 
upon  the  company  ^s  alleged  assets,  is  usually  a 
fraud;  the  company  that  has  been  incorporated 
without  an  established  business  for  a  nucleus,  and 
is  dependent  upon  the  sale  of  its  stock  for  working 
capital,  and  which  has  sold  a  portion  of  its  stock  to 
a  number  of  small  investors,  the  proceeds  received 
from  such  sale  being  insufficient  to  demonstrate 
the  success  of  the  business  contemplated,  or  to  ma- 
terially advance  it  beyond  the  organization  or 

*  See  ''Stock- Jobbing,"  page  143. 


CORPORATE  FINANCING.  77 

experimental  period,  is,  as  a  rule,  of  doubtful 
prospects — and  so  on. 

In  fact  the  earmarks  of  unworthiness  are  as 
apparent  in  a  business  enterprise  as  elsewhere, 
and  are  discernible  by  proper  investigation,  and 
a  proper  knowledge  concerning  the  subjects  herein 
treated. 

No  one  is  justified  in  undertaking  a  business 
venture  without  at  least  the  moderate  capital 
usually  required  to  carry  it  on  (or  the  means  of 
raising  such  capital),  and  trusting  to  financial 
accommodations  and  credit  for  success.  It  is 
undoubtedly  true  that  no  one  who  has  tried  to 
establish  a  business  without  a  suitable  capital, 
even  if  he  has  succeeded,  would  advise  another 
to  attempt  to  do  likewise;  for  it  involves  an 
amount  of  anxiety,  labor,  embarrassment  and 
hazard  which  is  unpleasant  to  reflect  upon.  To  do 
business  altogether  on  credit  requires  a  fortunate 
combination  of  circumstances  to  make  it  success- 
ful that  no  prudent  man  would  predict. 

It  might  be  said  with  propriety  that  the  uni- 
versal law  of  trade  is  that  the  enterprise  which 
attempts  to  conduct  its  business  upon  borrowed 
capital  alone  must  sooner  or  later  fail — that  is, 
where  the  company  attempts  to  conduct  its  busi- 
ness upon  financial  accommodations  secured  from 
regular  sources,  such  as  banking  houses,  brokers, 
etc.,  upon  trade  paper.    At  the  same  time,  a  com- 


78  COKPORATE  FINANCING. 

pany  may  do  a  largely  increased  volume  of 
business  upon  such  accommodations,  particularly 
where  the  principal  capital  required  is  only 
necessary  at  stated  periods ;  in  fact,  a  large  Chi- 
cago corporation  practically  conducts  the  prin- 
cipal volume  of  its  business  upon  funds  secured 
in  that  way,  and  loans  its  own  capital  through 
banking  and  regular  financial  channels,  upon  a 
higher  rate  of  interest  than  it  is  required  to  pay 
for  its  own  accommodation.  But  it  is  not  such  a 
corporation  as  the  ordinary  business  enterprise 
could  safely  imitate ;  its  securities  or  trade  paper 
could  be  converted  into  money  at  any  time  and 
under  any  circumstances,  without  difficulty. 

There  is  a  tendency  among  aggressive  business 
men  to  ** mortgage  the  future,''  so  to  speak,  and 
this  without  regard  to  repayment.  The  securing 
of  judicious,  long-time  loans  upon  a  bond  issue 
where  the  business  requires  additional  capital,  is 
not  alone  a  saving  in  the  rate  of  interest  but 
renders  the  undertaking  less  hazardous,  and  more 
convenient  and  certain  of  payment  out  of  the 
profits  that  may  be  safely  estimated ;  besides,  the 
bonds  of  a  staple  business  concern,  with  tangible 
assets,  are  invariably  in  good  favor  with  investors. 
Many  of  the  practical  questions  concerning  the 
issuing  of  such  bonds  and  preferred  stock  as  well, 
have  already  been  considered.* 

*  See  "Capital,  Bonds  and  Stocks,"  also  "Capitalization  of 
Corporations. ' ' 


CORPORATE  FINANCING.  79 

In  regard  to  the  extent  to  which  the  credit  of  a 
business  enterprise  may  safely  be  extended — that 
is,  the  proportion  which  the  capital  of  an  enter- 
prise should  bear  to  its  liabilities — necessarily 
varies  with  conditions.  It  has  been  stated,  how- 
ever, by  eminent  and  experienced  financiers 
that  a  man  should  not  extend  his  business  more 
than  three  times  the  amount  of  his  capital 
under  the  most  favorable  circumstances,  and  if 
it  be  a  large  business,  not  more  than  twice  his 
capital. 

We  have  already  alluded  to  what  has  proven  to 
be  a  very  satisfactory  method  for  the  raising  of 
additional  capital,  under  ordinary  circumstances, 
and  that  is  by  the  issuance  of  bonds,  drawing  a 
reasonable  rate  of  interest,  that  may  be  con- 
vertible into  stock  within  a  certain  given  period, 
at  the  option  of  the  holder.  This  enables  the  pur- 
chaser of  such  bonds  to  avail  himself  of  the  privi- 
lege of  becoming  a  stockholder  at  any  time  within 
the  period  provided  in  such  bonds,  should  he  so 
elect,  after  the  business  has  demonstrated  its 
merit,  and  the  enterprise  is  thereby  provided  with 
the  necessary  additional  capital,  which  it  can 
repay  out  of  the  profits. 

Many  business  men  will  readily  invest  in  such 
bonds,  with  the  privilege  of  changing  the  form  of 
investment  after  the  business  is  established,  who 
would  not  in  the  first  instance  purchase  stock. 


80  CORPORATE  FINANCING. 

Transferring  The  topic  of  this  section  has  fur- 
an  Established  wished  the  material  for  much  of  the 

Business    to    a 

Corporation.  Unfavorable  criticism  which  has 
been  made  upon  the  corporate  plan  and  abuses  of 
the  corporate  system;  and  this  is  made  the  sub- 
ject of  a  separate  discussion  under  appropriate 
headings.*  At  the  same  time,  some  of  the  legiti- 
mate advantages  offered  through  the  consumma- 
tion of  transactions  of  this  character  have  already- 
been  pointed  out.f 

In  the  preceding  pages  we  have  necessarily  dis- 
cussed many  of  the  important  questions  pertain- 
ing to,  and  which  invariably  arise  in  the  trans- 
ferring of,  an  established  business  to  a  corpora- 
tion. Those  heretofore  discussed  have  had  to  do 
with  the  advance  financial  arrangements  and 
objects  to  be  accomplished  rather  than  to  the  sub- 
sequent rights  of  the  parties  to  be  protected.  In 
the  following  pages  particular  attention  is  given 
to  the  substantial  benefits  to  be  derived  from  the 
corporate  plan  of  conducting  business,  as  well  as 
the  rights  of  the  parties  interested  therein. 

It  is  through  transactions  of  this  character  that 
advantages  are  obtained  by  the  owners  of  a  busi- 
ness, such  as  the  preservation  of  the  good  will, 
facilitating  the  sale  of  a  part  or  the  whole  of  the 


*  See  "Consolidation  of  Enterprises  and  Stock  Jobbing." 
t  See  *  *  The  Corporation  and  Its  Advantages. '  * 


CORPORATE  FINANCING.  81 

business,  and  the  obtaining  of  an  advantageous 
price  for  the  business  transferred,  etc. 

The  opportunity  last  referred  to  is  frequently- 
abused  ;  that  is,  the  valuation  placed  upon  a  busi- 
ness about  to  be  transferred  to  a  corporation  is 
inflated,  and  the  question  frequently  occurs  **to 
what  extent  may  a  business  or  property  be  over- 
valued without  rendering  the  parties  in  interest 
liable  therefor  T' 

This  question  has  been  the  subject  of  much  liti- 
gation, and  different  courts  have  taken  different 
views  thereon.  Without  attempting  to  enumerate 
the  rules  announced  in  the  various  decisions,  the 
most  favored  rule,  and  the  one  to  be  almost  every- 
where regarded  as  safe,  reliable  and  sound,  is  that 
if  the  directors  act  in  good  faiths  and  the  property 
transferred  has  a  substantial  value,  and  there  is 
no  fraud  connected  with  the  transfer,  their  valua- 
tion is  final,  even  if  excessive. 

A  different  rule,  however,  obtains  in  some  of 
the  States,  where  the  statutes  make  the  action  of 
the  Board  of  Directors  in  relation  to  such  matters 
final  in  the  absence  of  actual  fraud.  This  rule 
obtains  in  Delaware,  Maine,  New  Jersey  and  New 
York;  and  in  some  States,  where  mines  and  min- 
ing is  the  chief  subject  of  corporate  organizations, 
this  rule  is  recognized  either  by  statute  or  by  the 
courts  to  encourage  development  of  the  State's 
mining  resources. 


82  CORPORATE  FINANCING. 

More  latitude  is  everywhere  allowed  in  the  val- 
uation of  what  are  known  as  speculative  assets 
than  where  the  property  is  staple  and  easily 
valued;  and  in  every  case  the  question  of  what 
the  property  is  worth  to  the  corporation,  rather 
than  what  it  is  worth  to  the  individuals  selling,  will 
govern. 

A  business  that  has  been  established  by  an 
individual  or  an  association  of  individuals  under 
a  firm  name,  usually  possesses  a  valuable  property 
right  in  the  name  itself — ^which  is  in  reality  the 
subject-matter  of  the  good  will.  While  the  good 
will  of  a  firm,  or  individual  doing  business  alone, 
may  be  the  subject  of  transfer  and  sale,  and  there- 
fore valued  and  conveyed,  still  it  is  never  possible 
to  utilize  and  protect  this  form  of  property,  or 
obtain  its  full  value,  except  by  transferring  the 
same  to  a  corporation.  The  reason  of  this  is  that 
while  the  trade  name  may  be  thoroughly  estab- 
lished and  the  means  of  influencing  trade,  it  is,  in 
a  measure,  perishable,  and  loses  much  of  its  value 
once  the  individuals  who  have  created  it  are  known 
to  be  no  longer  its  owners;  while  if  it  is  trans- 
ferred to  a  corporation  organized  by  the  same 
persons  who  established  the  name,  it  becomes  per- 
manently associated  with  the  corporation  and  with 
the  other  advantages  that  accrue  to  the  trade  name 
of  a  corporation  (that  are  not  possible  to  an  indi- 


CORPORATE  FINANCING.  83 

vidual)  it  thereby  derives  a  permanency  and 
utility  that  cannot  ordinarily  be  lost. 

It  is  these  and  other  considerations  which 
justify  the  adequate  valuation  of  the  immaterial 
assets  of  a  firm  or  co-partnership  when  trans- 
ferring the  same  to  a  corporation  for  the  ulti- 
mate purpose  of  effecting  an  advantageous  sale — 
enlargement  or  permanent  establishment  of  a 
business. 

There  is  much  of  the  ** personal  relation"  exist- 
ing between  the  proprietor  of  a  business  con- 
ducted by  an  individual  or  co-partnership  and  the 
patrons  thereof  that  has  its  advantages,  and  in 
some  degree  at  least — and  in  certain  forms  of 
enterprises — ^may  argue  in  favor  of  the  personal 
as  against  the  impersonal,  i,  e.,  corporation  rela- 
tion ;  but  the  details  of  the  business  of  a  corpora- 
tion can  and  should  be  so  organized  as  to  over- 
come this  objection — that  is,  by  creating  personal 
responsibility,  if  not  a  personal  interest  for  de- 
partment heads  in  the  various  important  depart- 
ments of  the  corporation;  and  in  that  way  retain 
the  personal  interest  and  responsibility  so  essen- 
tial to  the  welfare  of  every  business  conducted 
upon  the  competitive  system. 

As  to  the  approved  manner  of  transferring 
assets  of  an  established  business  to  a  corporation 
for  money,  bonds  or  in  payment  for  its  stock: 
if  the  business  is  to  be  valued  and  purchased  from 


84  CORPORATE  FINANCING. 

an  inventory,  where  the  property  conveyed  is 
itemized,  the  resolution  of  the  Board  of  Directors 
taking  over  or  purchasing  such  property  should 
recite  that  the  property  had  been  itemized  and 
valued  at  the  aggregate  sum  of  whatever  is  to  be 
paid  for  the  business  conveyed;  and  the  articles 
named  in  the  inventory  may,  with  propriety,  be 
copied  and  made  a  part  of  the  bill  of  sale.  If,  on 
the  other  hand,  the  business  is  purchased  in  bulk — 
or  the  amount  of  property  estimated — then  the 
resolution  of  the  Board  should  recite  that  the 
property  had  been  appraised  in  bulk  and  valued 
by  the  Directors  at  the  total  amount  to  be  paid 
therefor. 

It  is  essential  that  all  due  formality  should  be 
observed  in  the  purchase  and  transfer  of  assets 
to  a  corporation  in  payment  for  its  stock  or  other- 
wise, and  where  it  is  feasible,  the  proposition  to 
sell  should  be  made  to  the  corporation  by  formal 
writing.*  This  will  enable  the  officers  to  make 
proper  investigation  of  the  business  offered,  and 
at  the  same  time  the  written  proposition  will  form 
the  basis  of  an  appropriate  resolution  of  purchase 
and  a  complete  contract  of  sale  when  formally 
accepted. 

If  there  is  real  estate  involved  in  the  transfer, 
naturally  the  title  will  be  carefully  examined  by 
competent  legal  counsel,  before  passing  upon  the 

*  See  form  in  Appendix,  page  229. 


CORPOKATE  FINANCING.  85 

proposition  to  purchase;  and  in  such  cases  the 
resolution  should  recite  that  such  examination  had 
been  made  and  the  title  found  merchantable  or 
otherwise,  and  that  the  proper  conveyance  or  title 
deeds  had  been  executed  by  the  owner  or  owners 
and  tendered  to  the  corporation  at  the  time  of 
the  proposed  formal  acceptance  of  the  offer  by  the 
Board  of  Directors. 

In  the  Appendix  hereto,  will  be  found  a  general 
form  of  resolution  which,  according  to  the  facts 
there  assumed,  purports  to  purchase  and  take 
over — through  the  commissioners  appointed  by 
the  Secretary  of  State  of  Illinois — from  a  cor- 
poration that  is  in  the  process  of  reorganization, 
an  established  business  in  payment  for  stock  sub- 
scribed for  by  the  reorganizer  mentioned  in  the 
Eeorganization  Certificate  shown.  The  resolu- 
tion there  given  will  suggest  the  method,  and  also 
the  form  of  resolution  applicable  for  the  purchase 
of  any  established  business  by  a  corporation 
except  that  in  the  case  there  assumed  no  written 
proposition  was  made  or  necessary,  on  account  of 
the  fact  that  the  purchasing  company  was  incor- 
porated for  the  express  purpose  of  operating  the 
business  purchased,  and  the  directors  are  assumed 
to  be  all  the  stockholders  as  well,  and  all  present 
and  acquiesce  in  the  terms  of  purchase  and  sale. 
In  such  a  case,  the  peculiar  facts  there  assumed 
(for  the  purpose  of  illustrating  an  approved  plan 


86  CORPORATE  FINANCING. 

of  effecting  a  reorganization  which  will  be  further 
explained  under  a  subsequent  heading),  dispense 
with  such  written  proposition. 

In  every  case  where  a  business  is  transferred 
from  one  or  more  of  the  directors,  or  parties  in 
interest,  to  the  corporation,  it  is  always  advisable 
to  have  the  formal  consent  of  the  stockholders  to 
such  a  purchase;  and  this  may  be  done  by  con- 
vening a  special  meeting  of  the  stockholders  for 
that  purpose,  and  submitting  the  question  of  pur- 
chase to  a  vote,  and  having  the  action  of  the  stock- 
holders in  that  regard,  a  matter  of  record.  Such  a 
resolution  would  simply  recite  the  facts,  and 
authorize  and  direct  the  Board  of  Directors  to  con- 
summate the  transaction  and  purchase  the  busi- 
ness at  a  given  price,  or  at  the  best  price  obtain- 
able. And,  it  might  be  added,  that  the  consent  of 
the  stockholders  to  the  acquiring  of  a  separate 
business,  or  to  the  transaction  of  any  unusually 
important  business,  is  always  to  be  recommended. 
Particularly  is  this  advisable  where  the  stock- 
holders are  few,  or  the  corporation  small. 

In  acquiring  property  a  business  corporation 
usually  stands  in  the  same  position  as  that  of  an 
individual,  and  all  the  important  questions  that 
would  concern  a  natural  person  relating  to  title, 
incumbrances,  right  to  transfer,  etc.,  are  neces- 
sarily present;  so  when  a  going  business  is 
acquired  by  one  corporation  from  another  it  is 


CORPORATE  FINANCING.  87 

necessary  to  see  that  all  formalities  are  observed 
by  the  selling  corporation  as  well,  and  that  lawful 
authority  is  obtained  to  make  such  sale. 

At  common  law  the  sale  of  a  going  solvent  and 
prosperous  business  could  not  be  affected  without 
the  unanimous  consent  of  all  stockholders  of  such 
corporation;  however,  the  statutes  of  the  various 
states  furnish  authority  for  such  transfers,  but 
require  the  consent  of  a  large  majority  of  the 
capital  stock  issued.  If,  however,  the  selling  cor- 
poration is  insolvent  or  in  a  failing  condition,  or 
unable  to  succeed  in  its  undertaking,  a  recital  of 
such  facts  in  the  resolution  of  sale  will  usually 
authorize  a  sale  of  all  the  company  ^s  assets  by 
the  Board  of  Directors  alone. 


CORPORATE   MANAGEMENT 


Frank's  ** Science  or  Organization,*'  etc. 


CHAPTER  in. 

CORPORATE  MANAGEMENT. 

Directors,  Officers — Their  Duties  Corporate  Records  and  Books  of 

and  Liabilities.  Account. 

Stockholders '  Rights  and  Liabil-  Examination     of     Books     and 

ities.  Records. 
By-Laws  and  Their  Uses. 

Directors  and  The  duties  and  liabilities  of  a 
DutYn^  ^nd  director  of  a  business  corporation 
Liabilities.  are  co-cxtensive — that  is,  his  pow- 
ers and  authority  on  the  one  hand  are  of  such  a 
nature  that  they  lead  to  a  corresponding  responsi- 
bility both  to  the  corporation  and  its  creditors. 
As  has  been  heretofore  shown,  the  authority  to 
bind  the  corporation  emanates  from  the  Board  of 
Directors ;  and  in '  consequence,  the  officers  are 
responsible  to  them.  The  officers  are  chosen  by 
the  Board  of  Directors,  and,  unless  restricted  by 
the  by-laws,  they  may  be  removed  by  the  Board 
for  sufficient  cause ;  and  if  the  by-laws  so  provide, 
any  officer  may  be  removed  at  the  pleasure  of  the 
Board. 

Directors   cannot,   however,    act  individually; 
they  must  do  so  as  a  body.    That  is,  no  legislation 

91 


92  CORPOKATE   MANAGEMENT. 

on  behalf  of  the  corporation  can  be  enacted  except 
by  the  Board  in  meeting  assembled,  and  the  will 
of  the  Board  when  thus  indicated,  is  to  be  carried 
into  effect  by  the  officers  of  the  corporation. 

The  peculiar  characteritics  of  a  corporation 
often  renders  notice  to  a  director  or  officer  also 
notice  to  the  corporation;  and  this  is  important 
in  relation  to  the  conduct  of  all  corporate  business ; 
such  notice  simply  means  information. 

In  order  to  charge  a  corporation  with  such 
notice,  however,  the  directors  or  officers  must  be 
shown  to  be  acting  for  the  corporation  at  the  time 
the  notice  is  received,  and  also  that  the  employ- 
ment of  the  director  or  officer  concerns  the  subject- 
matter  of  the  notice ;  in  other  words,  the  director 
or  officer  must  be  then  engaged  for  the  corpora- 
tion in  such  a  way  as  to  render  the  notice  appro- 
priate to  his  office  or  employment. 

Notice  to  a  Board  of  Directors  while  assembled, 
and  such  notice  to  one  of  them,  who  afterward 
communicates  the  same  to  the  Board  in  session, 
is  sufficient  notice  to  the  corporation  in  any  event. 

Under  the  common  law,  directors  are  liable  for 
issuing  stock  as  fully  paid,  when  in  fact  the  same 
is  not  so.  They  are  also  liable  for  the  payment 
of  dividends  out  of  the  capital  stock  of  the  com- 
pany, and  for  any  ultra  vires  acts  and  fraud  gen- 
erally, as  well  as  for  negligence  which  results  in 
a  loss  to  the  corporation.    In  other  words,  they 


CORPORATE   MANAGEMENT.  93 

are  responsible  for  many  acts  of  omission,  as  well 
as  commission. 

Under  the  statutes  of  the  various  States  they 
have  a  further  liability  imposed,  whereby  they  are 
held  to  the  responsibility  of  a  trustee  under  cer- 
tain circumstances.  They  are  always  trustees  for 
the  creditors  of  a  corporation,  and  also  in  certain 
dealings  in  relation  to  the  property  of  it.  The 
question  of  their  dealing  directly  with  the  cor- 
poration is  frequently  the  subject  of  litigation, 
and  they  are  invariably  held  to  a  strict  rule  of 
conduct  in  such  matters. 

A  business  corporation  has  no  power  or 
authority  to  loan  money,  except  it  be  to  further 
the  ends  of  its  business;  hence  it  could  not  law- 
fully do  so  to  a  director.  And  the  rule  that  one 
cannot  properly  occupy  the  dual  position  of  buyer 
and  seller  is  particularly  applicable  to  directors 
of  such  companies — to*  the  extent  that  any  secret 
advantage  thus  acquired  may  be  recovered  from 
such  directors.  At  the  same  time,  they  may  not 
abuse  any  information  acquired  as  a  director,  or 
obtain  secret  advantages  therefrom  to  the  detri- 
ment of  the  company. 

A  safe  rule  for  the  director  to  adopt  is  to  act  in 
all  things  pertaining  to  his  office  and  the  com- 
pany of  which  he  is  such  a  director  in  the  same 
way  as  he  would  act  if  the  business  transacted  for 
the  corporation  was  his  own  exclusively. 


94  COKPORATE   MANAGEMENT. 

A  director  is  not  disqualified  to  act  in  any  official 
capacity  for  his  corporation  on  account  of  his 
being  a  director.  In  fact,  it  is  usual  for  directors 
to  be  also  the  officers  of  the  corporation.  Par- 
ticularly is  this  true  in  small  or  medium-sized 
companies. 

It  is  always  necessary  that  there  should  be  a 
President  and  Secretary  in  every  business  cor- 
poration, and  it  is  usual  and  necessary  under  the 
laws  of  some  States  {e.  g.^  Illinois)  to  have  a 
Treasurer,  as  well. 

The  number  of  officers  that  a  company  may 
have  is  limited  only  by  the  will  of  the  Board  of 
Directors.  It  is  frequently  provided  by  the 
by-laws  that  certain  officers  of  the  corporation 
should  also  be  directors,  and  this  is  proper  and 
convenient;  for,  if  they  are  directors  as  well  as 
officers,  they  are  at  all  times  conversant  with  the 
consensus  of  opinion  of  the  Board  in  relation  to 
its  policy,  and  upon  all  matters  pertaining  to  the 
business. 

The  powers  and  duties  of  the  officers  of  a  cor- 
poration, (so  far  as  the  corporation  itself  is  con- 
cerned) depend  entirely  upon  the  provisions  of 
the  by-laws,  and  the  delegating  of  such  powers, 
and  the  classification  and  the  stating  of  the  duties 
of  the  various  officers  is  a  subject  that  should 
receive  special  attention  at  the  time  of  the  organi- 
zation of  every  corporation. 


CORPORATE   MANAGEMENT.  95 

By  properly  defining  the  powers  and  responsi- 
bilities of  each  officer  the  best  possible  results  are 
obtained,  and  each  officer  has  a  certain  clearly- 
defined  responsibility;  besides,  any  possibility 
of  controversy  over  confficting  authority  is  thereby 
averted. 

The  compensation  of  both  directors  and  officers 
is  a  proper  question  for  the  directors  themselves ; 
it  is  a  proper  subject  of  resolution  by  the  Board 
of  Directors,  enacted  and  recorded  on  the  records 
of  the  corporation  prior  to  the  performance  of 
the  service  in  question,  and  unless  abused,  the 
action  of  the  directors  in  this  regard  is  final. 

Directors  are  not  entitled  to  compensation 
unless  it  is  expressly  provided  that  they  shall 
receive  pay  for  their  services ;  and  a  salary  voted 
to  a  director  after  the  services  have  been  per- 
formed is  voidable  by  the  'stockholders.  Directors 
are  usually  vitally  interested  in  the  corporate 
enterprise,  and  their  election  as  directors  is 
usually  due  to  that  fact.  A  director  who  performs 
extra  services,  outside  of  his  duties  as  a  director, 
however,  may  be  entitled  to  compensation  there- 
for. 

The  established  rule  concerning  compensation 
of  directors  is  that  authority  for  its  payment  must 
be  obtained  without  fraud,  either  actual  or  con- 
structive, and  that  the  amount  thereof  must  be 
reasonable  for  the  services  performed. 


96  COKPOKATE   MANAGEMENT. 

A  salary  paid  to  directors  under  certain  circum- 
stances, e.  g.,  when  the  corporation  is  insolvent  or 
financially  embarrassed,  or  where  the  amount  is 
excessive  or  paid  out  of  the  capital  of  the  cor- 
poration to  the  detriment  of  the  stockholders,  may 
be  recovered  from  the  directors  by  an  appropriate 
proceeding. 

Another  familiar  principle  concerning  compen- 
sation of  directors  and  officers  alike  is  that  where 
the  salary  is  authorized  by  the  vote  of  the  party 
receiving  it — that  is,  if  his  vote  is  necessary  to 
its  creation — such  compensation  is  illegal.  At 
the  same  time  proper  and  adequate  compensation 
may  be  voted  directors  and  officers,  and  the 
amount  of  such  compensation  must  be  governed 
by  the  circumstances  of  the  particular  case. 

There  is  a  growing  disposition  among  legis- 
lators generally  to  increase  the  visitorial  power 
of  the  State  over  corporations,*  and  to  this  end 
require  certain  reports  to  be  made  by  officers 
periodically  concerning  their  affairs,  such  as  the 
furnishing  of  names  and  addresses  of  all  directors 
and  officers;  whether  the  corporation  is  availing 
itself  of  the  privileges  conferred  by  its  charter; 
the  amount  of  the  capital  stock  paid  in  since  its 
organization,  etc.,  and  providing  certain  penalties 
and  responsibilities  for  such  officers  for  the  failure 

*  Many  states  have  established  ' '  Commissions ' '  for  regulating 
corporate  affairs  since  this  text  was  written. 


CORPORATE   MANAGEMENT.  97 

to  comply  therewith.  In  addition  to  such  penalties 
imposed  by  the  State,  an  officer  may  be  held  liable 
to  the  corporation  for  any  injury  resulting  from 
his  negligence  or  failure  to  comply  with  such 
laws;  and  generally  an  officer  may  be  held  liable 
to  the  corporation  for  all  negligence  or  fraud. 
Nearly  all  the  States  now  have  special  laws 
regulating  foreign  corporations;  that  is,  where 
corporations  organize  in  one  State  and  undertake 
to  do  business  in  another,  in  the  latter  State  they 
are  regarded  as  **foreign  corporations.''  The 
special  acts  of  the  various  States  in  relation  to 
such  foreign  corporations  are  far-reaching  in  their 
effect,  as  will  be  seen  upon  reference  to  the  copy 
of  such  Act  now  in  force  in  the  State  of  Illinois, 
given  in  the  Appendix.*  It  will  be  observed  that 
in  Illinois  a  foreign  corporation  is  obliged  to  com- 
ply with  the  act  referred  to,  before  doing  business 
in  the  State.  What  constitutes  **  doing  business '* 
means  the  establishment  of  a  local  agency  or 
branch  or  other  more  or  less  technical  location 
for  the  carrying  on  of  the  business;  in  which 
event,  it  is  necessary  to  designate  some  person 
upon  whom  service  of  process  can  be  had  in  case 
of  litigation,  and  to  otherwise  comply  with  such 
act.  Upon  the  failure  of  such  foreign  corpora- 
tions to  comply  with  the  terms  of  such  local  laws, 
no  contract  can  be  enforced  by  it  in  the  foreign 

*  See  page  305. 


98  CORPORATE   MANAGEMENT. 

State ;  and  it  has  been  held  in  Illinois  that  subse- 
quent compliance  with  such  provision  of  the  law 
will  not  entitle  such  foreign  corporations  to 
enforce  a  contract  that  was  made  prior  to  such 
comphance. 


stockholders'       The  fuuctious  of  stockholders  in 

Rights  and  Li-         .        .  , .  i  •      •  i     -• 

abilities.  ^  busiucss  Corporation  are  limited ; 

the  general  and  principal  rights  of  the  stock- 
holder are  (a),  to  form  the  corporation,  or  bring 
it  into  existence  in  the  first  instance;  (b)  to  elect 
its  Board  of  Directors  from  time  to  time;  (c)  to 
make  its  by-laws,  unless  that  power  is  delegated 
to  the  directors;  (d)  to  increase  or  decrease  the 
capital  stock;  (e)  to  authorize  all  amendments 
to  the  charter;  (f)  to  participate  in  the  dividends; 
(g)  to  dissolve  the  corporation;  (h)  to  authorize 
the  giving  of  mortgages,  in  case  the  statutes  of 
the  State  require  it;  (i)  to  examine  the  books  and 
records  of  the  corporation  at  all  reasonable  times ; 
(j)  to  pass  upon  the  necessity  or  advisability  of 
the  sale  of  the  entire  business. 

The  liabilities  of  a  stockholder  are  even  less 
than  his  rights  as  such.  It  might  be  said,  if  the 
corporation  is  regularly  and  legally  formed,  that 
the  stockholder's  liabilities  are  limited  to  the 
unpaid  portion — if  any — of  the  stock  held  by  him ; 


CORPORATE   MANAGEMENT.  99 

and  unless  the  laws  of  the  State  under  which  the 
corporation  is  formed  are  complied  with  the  stock- 
holders are  liable  in  the  same  manner  and  to  the 
same  extent  as  partners. 

In  some  States  the  stockholder  has  a  liability 
in  addition  to  the  par  value  of  his  stock.  This 
liability  is  expressly  imposed  by  the  statutes  of 
such  States.  Such  liability  is  strictly  construed  by . 
the  courts  w^here  the  same  exists,  and  it  is  now 
generally  confined  to  the  claims  of  employees,  etc. 

In  discussing  the  liabilities  of  a  stockholder, 
they  will  be  referred  to  in  the  order  in  which  they 
naturally  arise — that  is,  the  liability  of  an  original 
stockholder  for  any  unpaid  portion  of  the  stock 
standing  in  his  name,  and  in  connection  therewith, 
the  liability  of  the  transferee  of  such  stock. 

Many  of  the  States  hold  the  transferee  liable 
jointly  with  the  original  subscriber  or  owner  of 
stock,  where  the  same  has  not  been  fully  paid 
for  at  the  time  the  stock  was  issued. 

It  has  been  already  shown  that  stock  originally 
issued  upon  inadequate  consideration,  i.  e.,  where 
property  has  been  fraudulently  accepted  by  the 
directors  in  exchange  for  stock,  or  where  the  value 
of  the  property  has  been  flagrantly  inflated,  is  not 
thereby  paid  for,  even  as  between  the  corpora- 
tion and  the  seller,  notwithstanding  the  stock  cer- 
tificate upon  its  face  purports  to  be  **  fully  paid 
and  non-assessable.''     In  such  cases,  the  trans- 


100  CORPOEATE  MANAGEMENT. 

feree  is  liable  jointly  with  the  transferor  (espe- 
cially to  creditors  of  the  corporation)  for  the 
differences  between  the  value  of  the  property 
received  by  the  corporation  and  the  par  value  of 
the  stock  issued  therefor. 

Where  the  statutes  of  a  State  do  not  make  the 
action  of  the  Board  of  Directors  in  this  regard 
final  in  any  event,  the  above  mentioned  rule 
applies  to  both  the  original  owner  of  the  stock  and 
any  subsequent  transferee ;  and  the  only  diffi)culty 
in  determining  the  liability  of  a  subsequent  stock- 
holder in  such  a  case  is  to  establish  sufficient  notice 
to  the  transferee  of  unpaid  stock,  or  to  determine 
what  circumstances  or  state  of  facts  will  con- 
stitute legal  notice  that  the  stock  accepted  by  him 
is  not  fully  paid,  when  the  stock  certificate  recites 
on  its  face  that  the  stock  thereby  represented  is 
fully  paid  and  non-assessable. 

The  rule  laid  down  in  Illinois  is  that  an 
exchange  of  property  for  stock  in  a  corporation 
must  constitute  a  valid  contract  of  bargain  and 
sale  in  good  faith  and  by  the  result  of  honest  judg- 
ment of  the  Board  of  Directors  of  the  corpora- 
tion accepting  such  property,  or  the  person  to 
whom  such  stock  is  issued  is-  liable,  both  to  the 
corporation  and  its  creditors  for  the  difference 
between  the  actual  value  of  the  property  conveyed 
and  the  face  or  par  value  of  the  stock  received; 
and  as  to  what  constitutes  constructive  notice  to 


CORPORATE   MANAGEMENT.  101 

a  subsequent  purchaser  of  such  stock  may  be 
illustrated  by  a  leading  case  in  Illinois  on  that 
question : 

A  corporation  was  organized  for  $1,000,000,  and 
all  its  stock,  excepting  two  shares,  was  issued  for 
an  interest  in  a  patent.  The  stock  certificates 
issued  for  this  invention  recited  on  their  face  that 
the  capital  stock  represented  thereby  was  **  fully 
paid  and  non-assessable. ' '  Some  of  this  stock  was 
sold  or  conveyed  to  a  third  party,  namely,  one 
who  was  not  originally  connected  with  the  organi- 
zation of  the  corporation.  The  corporation  in 
question  failed,  and  the  creditors  instituted  appro- 
priate proceedings  for  the  purpose  of  holding  the 
assignee  of  such  stock  jointly  liable  with  the 
original  owner. 

In  holding  that  the  transferee  was  liable  as  con- 
tended, the  Supreme  Court  of  Illinois  said:  **It 
is  not  conceivable  that  a  person  of  ordinary  intelli- 
gence and  prudence  buying  shares  of  stock  in 
such  a  corporation  would  not  become  advised  as 
to  what  property  the  corporation  had.  *  *  * 
It  is  clear  that  appellees  knew  that  the  corporation 
had  no  money  and  no  property  aside  from  the 
patent,  and  it  would  not  be  creditable  to  them  to 
say  that  they  believed  the  patent  to  be  worth 
$999,800.''  *  *  *  '*We  regard  the  proof  as 
establishing  the  fact  of  notice  to  appellees  of  the 
transaction  and  over-valuation.    They  knew  that 


102  COKPORATE   MANAGEMENT. 

the  corporation  did  not  have  a  paid-up  capital  of 
$1,000,000  and  that  *  *  *  had  not  paid  for 
the  stock,  unless  it  was  given  for  the  patent." 

Hence  it  will  be  seen  that  not  only  the  original 
subscribers  of  stock  may  be  liable  for  any  unpaid 
portion  thereof,  but  that  in  many  cases  subse- 
quent owners  of  such  stock  may  be  likewise  liable. 
In  the  language  of  the  Illinois  Supreme  Court; 
*^The  relation  of  the  stockholder  who  has  not 
paid  for  his  stock,  to  the  corporation  or  the 
creditors,  is  the  ordinary  one  of  debtor. ' ' 

The  presumption  is  that  a  corporation  has,  or 
at  some  time  had,  money  or  property  equal  in 
value  to  the  amount  of  its  capital  stock,  and 
creditors  have  a  right  to  presume  that  such  is 
the  case ;  hence  the  issuing  of  stock  for  less  than 
the  par  value  is  ordinarily  held  to  be  a  fraud  upon 
the  law,  creditors  and  subsequent  purchasers.  It 
is  ultra  vires  of  the  corporation  to  issue  stock 
for  less  than  its  face  value  in  money,  or  money's 
worth,  and  creditors  (and  under  certain  circum- 
stances other  stockholders)  may  insist  upon  the 
balance  being  paid  into  the  treasury. 

There  is  a  rule,  however,  that  where  a  cor- 
poration has  increased  its  capital  stock,  and 
becomes  insolvent,  it  may  then  issue  any  portion 
of  such  increased  stock  for  the  best  price  obtain- 
able and  no  one  will  be  liable  thereon,  especially 
to  existing  creditors;  but  such  a  practice  is  not 


CORPORATE  MANAGEMENT.  103 

to  be  encouraged,  particularly  where  the  rights 
of  subsequent  creditors  are  to  be  considered. 

One  of  the  fundamental  principles  in  the  law  of 
corporations  is  that  the  majority  may  exercise  the 
right  to  control  the  corporation's  affairs.  This 
right  has  suggested  many  opportunities  for  the' 
perpetration  of  fraud  upon  the  minority  stock-- 
holders,  and  the  repeated  instances  of  such 
attempts  which  have  come  before  the  courts  of 
last  resort  have  developed  a  system  of  jurispru- 
dence for  the  protection  of  the  minority  stock- 
holder. 

Some  of  the  familiar  methods  of  attempting  to 
take  advantage  of  the  minority  stockholder  are  for 
the  majority  to  vote  large  salaries  to  themselves, 
withhold  dividends,  incorporate  an  auxiliary 
enterprise,  and  favor  such  undertaking  at  the 
expense  of  the  parent  company,  and  various  other 
devices,  which  all  tend  to  the  same  result,  namely, 
the  detriment  of  the  minority  stockholder. 

Majority  stockholders,  through  directors  who 
are  their  tools,  often  perpetrate  such  wrongs  for 
their  direct  benefit.  The  dummy  director  is  now 
an  old  device  in  the  law  of  corporations,  and 
courts  of  equity  are  inclined  to  look  behind  all 
such  devices  to  ascertain  the  real  parties  in 
interest. 

The  language  of  the  United  States  Supreme 
Court  announces  the  modern  rule  in  relation  to 


104  COKPOKATE   MANAGEMENT. 

this  subject,  to- wit:  *^Wlien  a  number  of  stock- 
holders combine  to  constitute  themselves  a  ma- 
jority in  order  to  control  the  corporation  as  they 
see  fit,  they  become  for  all  practical  purposes  the 
corporation  itself,  and  assume  the  trust  relation 
occupied  by  the  corporation  toward  its  stock- 
holders." 

While  courts  of  equity  will  interfere  for  the 
protection  of  minority  stockholders,  they  will  not 
undertake  to  control  the  policy  or  business  meth- 
ods of  the  corporation,  so  long  as  they  are  con- 
ducted in  good  faith,  although  it  may  be  seen 
that  a  wiser  policy  might  be  adopted,  and  the 
business  more  successfully  conducted  if  other 
methods  were  pursued.  It  is  in  cases  of  fraud,  or 
where  some  undue  advantage  is  being  taken  of 
the  minority  stockholders,  that  courts  will  inter- 
vene and  afford  relief. 

It  is  not  infrequent  that  stockholders  under- 
take to  make  an  agreement  among  themselves 
whereby  certain  policies  shall  be  carried,  out; 
that  is,  where  certain  individuals  shall  be  retained 
in  office,  and  otherwise  attempt  to  regulate  the 
voting  of  stock,  and  in  that  way  control  the  cor- 
poration. 

Another,  and  not  unusual  question,  is  that  of 
limiting  the  sale  of  stock  either  to  a  class  of 
persons,  or  to  give  one  another  the  first  oppor- 
tunity and  right  to  purchase  stock  which  may  be 


CORPORATE  MANAGEMENT.  105 

offered  for  sale.  All  of  these  objects  are  difficult 
to  accomplish,  for  the  reason  that  they  are  fun- 
damentally against  public  policy. 

Any  contract  which  amounts  to  an  unreasonable 
restraint  of  trade  is  illegal — that  is,  where  the 
contract  attempts  to  perpetually  or  unreasonably 
deprive  the  stockholder  of  his  right  to  sell  or 
control  stock,  or  his  right  to  vote  thereon;  but 
an  agreement  to  place  stock  in  escrow  for  a  rea- 
sonable time  to  accomplish  a  lawful  purpose  or 
to  insure  the  right  to  purchase  such  stock  at  a 
given  price  is  legal.  And  a  condition  inserted  in 
the  body  of  the  stock  certificate,  regulating  the 
transfer  of  such  stock,  either  to  a  class  of  stock- 
holders, such  as  dealers  in  a  given  line  of  trade, 
or  to  existing  members  may  be  legal. 

In  addition  to  the  foregoing,  any  lawful  ob- 
ject may  be  accomplished  in  the  regulating  of 
transfers  of  stock,  but  as  before  intimated,  the 
terms  employed  in  accomplishing  such  objects 
must  necessarily  receive  careful  attention. 

A  stockholder's  right  to  vote  upon  his  stock, 
either  in  person  or  by  proxy,  is  necessarily  an 
important  one.  In  order  that  the  minority  stock- 
holder may  have  representation  in  the  directory, 
the  laws  of  most  States  provide  what  is  termed, 
** cumulative*'  voting;  e.  g.,  where  the  number  of 
directors  is  five,  and  the  stockholder  votes  his 
shares  of  stock  under  the  cumulative  system,  he 


106  CORPORATE  MANAGEMENT. 

would  have  five  votes  for  each  share  of  stock  held 
by  him,  which  he  could  cast  collectively  for  one 
director,  or  divide  them  among  the  five,  as  he 
might  choose. 

In  case  a  stockholder  cannot  be  present  at  the 
meeting  of  the  stockholders  of  his  corporation, 
he  may  appoint  a  proxy  (to  represent  him),  with 
full  power  to  exercise  all  the  rights  of  a  stock- 
holder ;  a  proper  form  of  such  proxy  will  be  found 
in  the  Appendix.*  Such  proxies  may  be  made 
for  a  single  meeting  or  for  a  given  length  of  time, 
and  until  acted  upon,  they  are  subject  to  be  re- 
voked at  the  will  of  the  stockholder. 


By-Laws  and  The  importance  of  a  proper  code 
Their  Uses.  of  by-laws  for  the  government  of  a 
corporation  cannot  be  overestimated.  They  are 
the  internal  law  for  the  government  of  the  cor- 
poration itself;  the  duties  and  powers  of  its  offi- 
cers emanate  from  them,  and  the  rights  of  the 
stockholders  are  often  curtailed  or  enlarged  by 
their  provisions. 

By-laws  may  not  contravene  any  provision  of 
the  charter  itself  or  the  laws  of  the  State  under 
which  the  corporation  owes  its  existence,  nor  the 
common  law,  or  be  against  public  policy  or  the 
laws  of  the  land,  and  they  may  not  be  inequitable 
or  unjust  or  unreasonable  in  their  nature. 

*  Page  281. 


CORPORATE  MANAGEMENT.  107 

Aside  from  these  limitations  they  may  contain 
any  rule  or  provisions  that  the  f  ramer  may  choose 
to  incorporate  therein. 

It  is  always  wise  to  include  in  the  by-laws  of  a 
new  company  the  well-settled  important  rules  of 
law  of  the  State  of  its  creation,  governing  its  con- 
duct for  the  guidance  of  the  directors  and  officers. 
Frequently  it  is  desired  that  the  duties  as  well  as 
the  authority  of  each  officer  should  be  clearly  and 
minutely  defined  in  order  that  no  conflict  between 
such  officers  shall  occur,  and  this  is  always  to  be 
commended  where  such  a  course  is  practicable  or 
feasible,  but  in  small  companies  it  is  unwise  to 
burden  and  handicap  the  management  with  un- 
necessary rules  which  would  interfere  with  the 
conduct  of  the  business  itself. 

Every  stockholder  and  officer  is  bound  by  the 
lawful  provisions  of  the  by-laws,  and  this  whether 
they  ever  consented  to  their  enactment  or  ever 
knew  of  their  existence,  but  there  is  a  diiferent 
rule  obtaining  in  regard  to  the  public.  The  by- 
laws of  a  corporation  should  not  affect  strangers 
dealing  with  the  corporation,  and  the  violation 
of  a  rule  contained  in  the  by-laws  will  not  relieve 
the  corporation  from  liability  to  third  persons. 
At  the  same  time,  creditors  may  insist  that  the 
provisions  of  the  by-laws  shall  be  enforced,  and, 
of  course,  the  stockholders  have  the  same  right. 

Forfeitures,  fines  and  the  like  can  be  enforced 


108  CORPORATE  MANAGEMENT. 

only  through  and  in  accordance  with  the  by- 
laws, unless  there  are  statutory  provisions  there- 
for; and  the  question  of  a  stockholder's  right  to 
vote  may  be — within  certain  lawful  limits — reg- 
ulated thereby. 

It  is  impossible  to  suggest '  an  arbitrary  or 
** stock''  form  of  by-laws,  as  the  exigencies  and 
peculiar  conditions  of  each  organization  must 
be  taken  into  account;  but  the  form  of  by-laws 
given  in  the  Appendix  hereto,*  will  be  found  sat- 
isfactory, or  to  contain  useful  suggestions  in  the 
preparation  of  such  by-laws  for  any  ordinary 
corporation,  particularly  where  it  is  organized 
under  the  laws  of  Illinois. 

In  the  organization  of  companies  under  the 
laws  of  the  various  States,  the  by-laws  should  be 
drawn  in  conformity  with  such  local  laws,  and 
invariably  require  the  utmost  skill  in  their  prepa- 
ration. 

The  right  to  make  by-laws  is  primarily  in  the 
stockholders  of  the  corporation,  unless  that  power 
is  delegated  to  the  directors,  either  by  charter 
provision  or  statute  law  of  the  State  where  the 
corporation  is  created.  The  tendency  of  modem 
legislators  is  to  delegate  the  power  to  the  direc- 
tors of  the  corporation,  and  where  the  right  to 
make  by-laws  is  vested  in  the  directors,  either  by 
statutes  or  by  the  stockholders  themselves,  the 

*  See  page  253. 


CORPORATE  MANAGEMENT.  109 

directors  also  have  the  power  to  amend  or  re- 
peal the  same. 

The  difference  between  the  by-laws  of  a  cor- 
poration and  its  formal  resolutions  is  chiefly  the 
permanency  of  the  former.  While  both  are  sub- 
ject to  amendment  or  repeal,  unless  the  power  to 
act  upon  the  resolution  is  limited  by  the  by-laws, 
it  is  subject  at  all  times  to  the  will  of  the  directors 
or  stockholders,  as  the  case  may  be.  For  this  rea- 
son, it  is  customary  to  make  the  question  of 
compensation  of  officers  a  subject  of  special  res- 
olution, and  to  have  such  resolution  embody  the 
amount  of  the  compensation  to  be  voted,  and  to 
conclude  with  the  phrase  **  subject  to  the  further 
action  of  this  Board.*'  The  purpose  of  this  limita- 
tion is  to  make  the  compensation  of  an  officer 
wholly  subject  to  the  will  of  the  Board  of  Di- 
rectors— ^that  is,  to  leav^  the  power  and  to  facili- 
tate the  right  to  change  such  compensation  as 
the  circumstances  may  suggest. 

It  is  not  infrequent  that  the  directors  and  offi- 
cers themselves  violate  or  ignore  important  pro- 
visions of  the  by-laws.  Where  this  has  been  done, 
it  is  well  to  ratify  the  acts  done  contrary  to  the 
provisions  of  the  by-laws,  where  the  same  are 
not  contrary  to  the  interests  of  the  corporation 
itself.  Such  ratification  may  be  accomplished  by 
proper  resolution  adopted  by  the  Board  of  Di- 
rectors in  meeting  assembled. 


110  CORPOKATE   MANAGEMENT. 

It  should  be  borne  in  mind  that  the  by-laws  of 
every  corporation,  as  well  as  all  important  reso- 
lutions of  the  directors,  should  be  accurately 
transcribed  upon  the  Minute  Book  of  the  corpo- 
ration, and  preserved  in  this  way.*  In  the  case 
of  large  corporations  it  is  not  infrequent  that 
the  by-laws  are  printed  and  circulated  among 
the  members. 


Corporate       The  books   of  accouut  that  are 

Records     and  t        j 

Books  of  Ac-  peculiar  to  corporations,  and  not  m 
count.  ^gg  i^y  general  unincorporated  con- 

cerns, are  few.  They  consist  generally  of  the 
Minute  Book,  Stock  Certificate  Book,  Transfer 
Book  and  Stock  Ledger.  Aside  from  these,  it  is 
not  unusual  for  the  treasurer  to  have  a  Private 
Ledger  in  which  to  keep  Controlling  Accounts. 
Besides,  it  is  customary  for  all  modern  business 
corporations  to  have  a  more  strict  and  compre- 
hensive System  of  Accounting,  particularly  a 
complete  Voucher  System,  by  which  an  accurate 
and  conclusive  accounting  can  be  furnished  of  all 
departments,  and  at  any  and  all  times,  for  the 
benefit  and  information  of  stockholders. 

The  statutes  of  a  few  States  of  the  Union  re- 
quire other  corporate  books  to  be  kept,  known  as 
Books  of  Publicity,  but  they  are  the  exception. 

*  Under  the  law  of  some  jurisdictions  (South  Dakota,  for  in- 
stance), by-laws  are  not  operative  until  so  recorded. 


CORPORATE  MANAGEMENT.  Ill 

Perhaps  the  book  that  is  universally  conceded 
to  be  first  in  importance  amoung  those  peculiar 
to  the  corporation  is  its  Minute  Book — by  which 
is  meant  the  book  wherein  the  acts  and  proceed- 
ings of  the  corporation  itself  are  recorded,  and 
particularly  the  acts  that  require  sanction  or  au- 
thority from  the  Board  of  Directors;  and  these 
include  the  Record  of  the  Adoption,  as  well  as  a 
Transcript  of  the  By-Laws  and  their  Amend- 
ments. 

When  the  corporation  is  sufficiently  large  to 
justify  it,  there  should  be  two  separate  Minute 
Books,  one  for  the  stockholders,  and  the  other 
for  the  Board  of  Directors,  in  which  to  record  the 
meetings  and  proceedings  of  each;  and  these 
books  should  be  securely  bound  or  protected 
against  any  possible  forgery  or  important  change 
without  due  authority. 

The  most  approved  and  convenient  plan  of 
keeping  the  Minute  Book  of  the  corporation  is 
to  have  a  Certified  Copy  of  the  Charter  attached 
to  the  first  page  of  this  book,  or  to  have  the  sec- 
retary copy  the  Charter  verbatim  at  the  begin- 
ning thereof.  Then  the  minutes  of  the  organi- 
zation meetings  should  follow  in  their  proper 
order  and  dates. 

The  By-Laws  should  be  recorded  elsewhere  in 
the  Minute  Book,  preferably  at  the  back  (where 
bound  books  are  used),  leaving  enough  unused 


112  CORPORATE  ]VIANAGEMENT. 

pages  after  their  recording  to  insert  any  and  all 
amendments  that  may  be  made  to  the  By-Laws. 
After  this  the  minutes  of  each  succeeding  meeting 
should  be  recorded  as  they  occur,  following,  of 
course,  the  meetings  to  organize. 

It  is  not  necessary  that  the  minutes  of  meet- 
ings be  written  up  at  or  immediately  following 
the  meeting  to  be  recorded,  nor  is  it  necessary 
that  the  minutes  be  in  the  handwriting  of  the 
secretary ;  but  it  is  advisable  that  the  minutes  of 
every  meeting  should  be  promptly  recorded  in 
order  that  no  errors  or  omissions  may  be  made, 
and  in  every  case  they  should  be  signed,  at  least, 
by  the  secretary. 

Care  should  invariably  be  taken  to  preserve  all 
documents  and  writings  coming  into  the  hands  of 
the  secretary,  such  as  proxies,  original  motions 
and  resolutions  that  have  been  reduced  to  writ- 
ing by  the  member  offering  the  same.  After  such 
documentary  records  have  been  recorded  they 
should  be  preserved  for  future  reference  or  com- 
parison by  a  proper  filing  system. 

If  the  minutes  of  meetings  are  not  taken  in 
shorthand,  there  should  be  notes,  at  least,  made 
of  all  important  transactions,  and  the  minutes 
should  then  be  written  up  from  such  notes. 

It  is  unquestionably  advisable  to  approve  the 
minutes  of  all  meetings  at  the  next  succeeding 
regular  meeting  of  the  body,  and  this  may  be  done 


CORPORATE   MANAGEMENT.  113 

by  proper  resolution  after  the  same  have  been 
read;  but  the  approval  of  the  minutes  of  a  reg- 
ular or  special  meeting  of  a  Board  of  Directors 
of  a  corporation  cannot,  in  the  absence  of  a  spe- 
cial notice  being  given  in  the  call  therefor,  be 
amended  or  approved  at  a  subsequent  special 
meeting  of  the  same  body,  unless,  of  course,  all 
directors  are  present,  and  the  amendment  or  ap- 
proval is  unanimously  concurred  in. 

Erasures  should  never  be  made  to  correct  er- 
rors or  omissions.  The  approved  method  is  to 
draw  a  red  line  through  any  error  that  may  have 
occurred  and  to  insert  the  correction  directly  over 
the  word  or  phrase  corrected,  and  in  this  way  er- 
rors may  be  corrected,  and  the  manner  of  accom- 
plishing the  same  is  explanatory  of  all  resolu- 
tions authorizing  such  corrections. 

In  supplying  omissions  from  minutes,  unless 
the  matter  omitted  is  too  voluminous,  it  should  be 
inserted  at,  or  near  the  point  of  omission  in  the 
record ;  but  where  a  resolution  or  other  complete 
transaction  has  been  omitted,  then  it  is  advisable 
to  make  a  separate  entry  thereof,  either  at  the 
bottom  of  the  page  where  the  matter  omitted 
should  have  been  originally  recorded,  or  in  any 
convenient  place  in  the  Minute  Book,  taking  care 
to  make  a  note  of  such  omission  in  red  ink  in  the 
body  of  the  minutes  where  the  omission  occurred, 
calling    special    attention    to    the    omission    and 


114  CORPOEATE  MANAGEMENT. 

where  the  matter  omitted  may  readily  be  found 
subsequently  in  the  Minute  Book. 

The  Stock  Ledger  should  show  to  whom  the 
capital  stock  was  issued,  and  how  it  has  been 
paid,  and  by  whom.  This  ledger  can  be  made 
self-balancing  by  establishing  a  Controlling  Ac- 
count in  the  General  Ledger,  entitled  **  Stock 
Ledger  Balances,'^  and  the  balance  of  which  will 
show  the  standing  of  the  Stock  Ledger  without 
drawing  off  the  individual  accounts,  the  net  bal- 
ance of  which  should  always  be  in  agreement  with 
that  of  the  controlling  account. 

It  is  the  custom  in  most  corporations  for  the 
president,  treasurer  or  some  confidential  employe 
to  keep  a  Private  Ledger,  provided  with  a  lock, 
in  which  are  kept  the  accounts  which  it  is  desired 
shall  not  be  accessible  to  the  regular  employes. 
These  are  usually  Capital  Stock,  Profit  and  Loss, 
Loans  and  Investments,  Dividends,  Personal 
Drawing  Accounts,  Salaries,  and  any  special  Ac- 
counts of  a  Confidential  Nature.  A  Controlling 
Account  is  then  opened  in  the  General  Ledger 
entitled,  *^ Private  Ledger,"  to  which  the  amount 
of  the  net  debit  or  credit  balance  of  these  accounts 
is  posted  in  one  item  at  the  close  of  each  month. 
This  provides  the  amount  necessary  to  complete 
the  General  Trial  Balance,  and  determine  whether 
errors  have  been  made  in  any  of  the  other  ac- 
counts,  besides   furnishing   complete   protection 


CORPORATE   MANAGEMENT.  115 

against  the  forcing  of  balances.  The  keeping  of 
such  a  book  also  furnishes  the  management  with 
accurate  information  as  to  the  actual  condition  and 
progress  of  the  business  and  withholds  the  same 
from  those  not  entitled  to  the  same. 

In  some  companies,  the  controlling  account  in 
the  General  Ledger  is  dispensed  with,  the  list 
of  Balances  drawn  off  by  bookkeepers  at  close 
of  the  month  being  handed  to  a  person  keeping 
the  Private  Ledger,  to  which  he  then  adds  his  Net 
Balance,  and  determines  whether  or  not  the  gen- 
eral books  are  correct. 

In  keeping  the  Stock  Certificate  Book  of  a  cor- 
poration, care  should  be  taken  to  avoid  real  or 
apparent  over-issue  of  stock.  This  may  be  ac- 
complished by  insisting  upon  a  proper  surrender 
and  cancellation  of  all  outstanding  certificates  at 
the  time  of  a  transfer,  by  observing  and  comply- 
ing with  the  usual  blank  forms  provided  in  every 
properly  worded  Stock  Certificate  Book,  and  by 
making  proper  entries  of  all  payments  and  trans- 
fers of  stock  this  important  branch  of  a  corpora- 
tion's accounting  may  be  easily  handled. 


Examination      The  investing  public  are  now  al- 
Records.  most  Universally  demanding  an  In- 

dependent Investigation  and  Report  On  the  Con- 


116  CORPORATE  MANAGEMENT. 

dition  and  Operative  Eesults  of  a  going  business 
before  seriously  considering  or  taking  any  fav- 
orably important  action  thereon. 

Particularly  is  this  so  where  financiers  are  di- 
rectly or  indirectly  concerned. 

The  cautious  business  man  also  demands  such 
information,  and  the  seller,  or  party  desiring 
financial  assistance,  is  usually  ready  and  willing 
to  furnish  such  a  report  where  his  business  is 
prosperous,  or  even  solvent,  and  present  a  rea- 
sonable business  opportunity. 

The  great  public,  or  quasi  public  corporations, 
publish  annually  a  report  of  this  character  for 
the  benefit  of  their  stockholders. 

The  compilation  and  furnishing  of  this 
important  information  is  often  entrusted  to  audit 
companies,  whose  equipment  for  the  preparation 
and  supplying  of  such  reports  is  a  force  of  ac- 
countants. 

But  the  varying  conditions  and  vitally  impor- 
tant questions  which  are  necessarily  met  in  the 
compilation  of  such  information,  brings  the  most 
important  part  of  this  service — ^viz.,  suggestions 
as  to  possible  corrections  and  supplying  in  ad- 
vance of  such  audit  of  important  omissions  in  the 
corporate  records  and  proceedings,  etc.,  which  will 
assist  the  client  in  accomplishing  the  results  de- 
sired— outside  and  beyond  the  scope  and  qualifi- 
cations of  the  accountant.  All  these  features  are  so 


CORPORATE   MANAGEMENT.  117 

closely  allied  to  the  work  of  the  corporation  law- 
yer, who  should  be  experienced  in  the  conduct 
of  transactions  of  this  character,  that  a  combina- 
tion of  the  two  undertakings  necessarily  proves 
of  great  advantage  to  the  client.  Hence,  many 
of  the  larger  corporations  are  now  examined 
under  the  supervision  of  legal  counsel,  particu- 
larly when  any  important  changes  or  financing  are 
contemplated. 

In  making  an  examination  of  corporate  books 
and  records,  the  Minute  Book  should  invariably 
furnish  evidence  of  the  authority  for  all  large 
transactions  outside  the  regular  course  of  busi- 
ness; and  recourse  is  necessarily  had  to  this  book 
as  a  basis  for  an  intelligent  examination  of  the 
corporation's  transactions.  Besides,  it  is  fre- 
quently advisable  and  necessary  to  determine 
whether  the  corporation  is  exceeding  its  authority 
and  transacting  business  outside  the  scope  of  its 
Charter,  and  reference  for  this  purpose  is  neces- 
sarily had  to  the  Charter  or  Certificate  of  Incor- 
poration itself. 

Important  contracts  may  necessarily  have  to  be 
construed  in  order  to  ascertain  their  real  import. 
Then,  there  may  be  other  legal  objections  to  the 
manner  of  issuing  and  payment  of  stock  which 
would  suggest  themselves  only  to  one  versed  in 
the  law,  and  which,  if  discovered,  might  change 
the  entire  aspect  of  affairs.    Therefore,  a  proper 


118  CORPOEATE   MANAGEMENT. 

investigation  of  all  these  matters  should  invari- 
ably be  made  in  advance  of  the  Audit,  particu- 
larly whenever  it  is  desirable  to  have  an  Earnings 
Statement  to  interest  outside  capital,  or  for  re- 
organization purposes. 

The  orderly  course  of  an  independent  examina- 
tion of  corporate  books  and  records  is  to  first 
examine  the  Articles  or  Certificate  of  Incorpora- 
tion. This  will  show  the  date  of  organization, 
the  purposes  for  which  the  company  was  organ- 
ized, the  amount  of  authorized  capital  stock,  and 
who  is  liable  for  its  payment. 

The  Minutes  of  the  Stockholders  and  Directors' 
Meetings  should  then  be  taken  up.  These  rec- 
ords will  show  the  manner  of  incorporating,  the 
consideration  for  which  stock  has  been  issued, 
how  the  original  assets  were  acquired,  authority 
for  all  extraordinary  expenditures,  the  remunera- 
tion of  officers,  the  amount  of,  and  authority  for, 
all  dividends  paid,  and  the  warrant  for  the  making 
of  important  and  unusual  contracts  that  may  be 
entered  into  outside  the  general  course  of  busi- 
ness. 

The  Stock  Certificate  Book  and  Transfer  Jour- 
nal are  then  examined  and  checked  against  the 
Stock  Ledger  to  determine  the  amount  of  the 
capital  stock  outstanding,  and  the  owners  thereof, 
as  well  as  to  guard  against  any  over-issue  of 
stock. 


CORPORATE  MANAGEMENT.  119 

The  Trial  Balances  of  the  initial  and  terminat- 
ing dates  of  the  Audit  contemplated  are  next  ex- 
amined and  verified  with  the  Books  of  Account. 
When  the  Balance  Sheets  of  either  or  both  dates 
are  given  they  should  be  carefully  examined, 
particular  attention  being  given  to  the  closing 
entries. 

In  all  examinations,  the  verification  of  the 
Cash  Accounts  is  of  controlling  importance.  While 
the  investigation  may  not  be  conducted  with  the 
special  object  of  detecting  fraud  or  shortages,  all 
necessary  precautions  are  to  be  taken  to  guard 
against  the  possibility  of  such  irregularities  be- 
ing passed  over. 

The  count  of  Cash  on  Hand  is  taken  at  the  in- 
ception of  the  Audit,  and  a  detailed  list  made  of 
all  Cash,  Cash  Tickets,  Vouchers  and  Checks, 
Money  Orders,  etc.,  on  hand.  A  Certified  State- 
ment from  the  Bank  should  then  be  obtained. 
After  this  is  done,  the  Bank  Statement  and  Can- 
celed Checks  are  examined,  and  reconciliation 
made  with  the  Bank  Balance  as  shown  by  th© 
company's  Cash  Book. 

In  cases  where  the  date  of  the  examination  is 
subsequent  to  the  closing  date  of  the  audit,  all 
entries,  footings,  and  bank  deposits  must  be  veri- 
fied for  the  intervening  period.  The  cash  items 
are  then  worked  back  by  the  adding  to  the  balance 
the  disbursements,  and  deducting  the  receipts, 


120  CORPORATE   MANAGEMENT. 

which  should  give  the  correct  balance  as  at  clos- 
ing date  of  audit. 

The  footings  of  the  Cash  Book,  general  and 
subsidiary,  for  the  entire  period  are  checked.  The 
disbursements  are  verified  by  the  Vouchers  sup- 
porting payments  both  as  to  payees  and  amounts. 
On  the  receipts  side,  the  cash  sales  are  checked 
from  the  records,  and  all  discounts  and  allowances 
verified.  The  remittances  are  checked  against 
the  Ledger  accounts,  and  the  total  receipts  of  each 
day  against  the  bank  deposits. 

The  footing  of  all  books  of  original  entry  must 
be  checked,  and  postings  to  General  Ledger  veri- 
fied. 

If  the  General  Ledger  contains  controlling  ac- 
counts with  subsidiary  ledgers,  these  must  be  in 
perfect  agreement.  Where  differences  are  found 
to  exist  they  must  be  located  and  corrected.  If 
no  controlling  accounts  are  kept,  they  must  be 
constructed,  and  the  balances  of  subsidiary  ledg- 
ers verified  in  the  aggregate. 

All  cash  items  and  column  footings  must  be 
checked  from  General  Ledger  into  Cash  Book  and 
afterward  reviewed  to  see  that  all  this  class  of 
items  are  cleared  on  the  receipt  side  of  the  Cash 
Book. 

The  postings  from  all  other  books  of  ori.srinal 
entry  are  checked  into  the  General  Ledger.  Foot- 


COBPORATE  MANAGEMENT.  121 

ings  of  all  accounts  in  the  General  Ledger,  open 
and  closed,  must  be  checked  for  the  entire  period 
and  balances  verified. 

Sales  Books  are  footed  and  charges  verified  by 
comparison  with  Original  Orders  and  Shipping 
Receipts.  Returns  and  Allowances  are  compared 
with  Customers'  Correspondence,  Entries  in  Re- 
turn Goods  Journal  and  Stock-Keeper's  Records. 

Journal  entries  are  verified  by  supporting 
Vouchers,  which  must  all  show  proper  signatures 
of  approval  and  authorization. 

Voucher  Record  is  verified  by  comparison  with 
Original  Invoices.  All  Unpaid  Vouchers  are 
listed,  the  balance  showing  the  amount  outstand- 
ing, which  should  be  in  agreement  with  Accounts 
Payable  in  General  Ledger. 

Pay  Rolls  must  be  verified  as  to  extensions  and 
footings,  and  be  signed  by  some  person  in  author- 
ity. 

Analyses  are  made  of  Profits  and  Loss  and 
such  Capital  and  Expense  accounts  as  may  be 
deemed  necessary  to  show  the  results  of  opera- 
tions of  business.  Adjusting  Journal  entries  are 
made  for  such  errors  and  omissions  as  have  been 
developed  in  the  course  of  the  examination. 

In  the  verification  and  valuation  of  Assets  and 
Liabilities,  the  Title  Deeds  to  all  real  estate  should 
be  examined  and  compared  with  book  value  of 


122  CORPOKATE   MANAGEMENT. 

property,  as  well  as  verification  with  amount  ac- 
tually paid.  Proper  charge  for  any  depreciation 
should  be  made. 

The  Plant  and  Machinery  Account  should  be 
verified  by  actual  examination  and  comparison 
with  Original  Invoices  (or  appraisal).  Care 
Should  be  taken  to  see  that  no  items  which  should 
properly  be  classed  as  Eepairs  and  Maintenance 
are  charged  to  Additions  and  Betterments  for 
here  is  often  found  the  basis  of  inflated  valuations 
in  assets. 

Depreciation  may  be  charged  off  at  close  of 
each  fiscal  period,  the  percentage  being  such  as 
to  finally  reduce  the  cost  of  the  plant  to  its  resid- 
ual value  at  the  date  when  it  is  estimated  it  will 
have  to  be  replaced.  Or,  another  method  is,  to 
provide  for  the  depreciation  of  a  plant  by  credit- 
ing out  of  the  net  profits  for  the  year — a  certain 
fixed  percentage  of  the  cost  of  the  plant  and  ma- 
chinery to  an  account  called  **Eeserve  for  Depre- 
ciation." This  maintains,  at  all  times,  a  charge 
on  the  Ledger  equal  to  the  actual  cost,  and  is 
believed  by  many  to  be  a  better  plan  than  charg- 
ing, each  year  an  arbitrary  amount  on  account  of 
depreciation.  It  would  be  possible  to  ascertain 
the  exact  cost  of  the  plant  (by  the  first  method) 
by  going  back  over  the  books  for  the  period  and 
ascertaining  how  much  had  been  charged  each 
year;  but  by  keeping  this  account  in  the  manner 


CORPORATE   MANAGEMENT.  123 

last  suggested,  the  actual  cost  is  known  and  the 
depreciation  is  provided  for. 

Patents,  Franchises,  Leaseholds,  etc.,  are  sub- 
ject to  such  annual  depreciation;  and  the  con- 
servative plan  is  to  charge  off  a  sufficient  amount 
each  year,  so  as  to  extinguish  their  value  at  the 
time  of  expiration  of  such  rights.  However,  in  the 
case  of  patents  this  is  often  an  unjust  and  errone- 
ous method,  for  patents  often  have  an  increasing 
value  with  their  age  and  are  not  wholly  valueless 
when  the  rights  expire ;  so  each  case  must  receive 
individual  treatment  according  to  the  facts. 

Inventories  should  be  signed  by  the  parties 
taking  them,  and  verified  by  the  accountant  as  to 
extensions  and  footings.  Prices  should  be  cost  or 
market,  whichever  lowest.  Goods  on  Consign- 
ment must  be  stated  separately.  All  Bonds, 
Stocks  and  other  securities  must  be  verified  by 
actual  examination  and  ordinarily  valued  at  cost 
or  market,  whichever  is  lowest. 

Accounts  Receivable  must  be  examined  and  De- 
linquent Accounts  listed.  A  reserve  for  all  delin- 
quents must  be  created  in  the  Liabilities,  and  set 
up  on  the  Balance  Sheet,  or  carried  in  suspense 
according  to  the  particular  circumstances. 

Notes  Receivable  On  Hand  are  checked  with 
Note  Register  and  verified  by  actual  examination. 
Notes  Discounted,  but  not  matured,  are  verified 
by  Certificate  with  Itemized  List  from  Bank,  for 


124  CORPORATE  MANAGEMENT. 

which  a  Contingent  Liability  is  set  up  on  Balance 
Sheet. 

Notes  Payable  are  checked  against  Note  Regis- 
ter, and  if  deemed  necessary,  verified  by  commu- 
nication with  holders.  Notes  Paid  are  verified  by 
examination  of  Cancelled  Notes.  Notes  Payable, 
unmatured,  on  which  the  company  are  indorsers, 
must  be  set  up  as  a  Contingent  Liability. 

Reserves  for  discounts  and  all  unexpired 
charges  and  unmatured  obligations  must  be  pro- 
vided. 

Adjusting  Journal  entries  must  be  made  to  set 
back  in  surplus  such  bad  debts  or  other  charges 
as  properly  belong  to  periods  previous  to  the  one 
under  review. 

The  following  is  a  list  of  exhibits  and  schedules 
which  should  be  prepared  in  order  to  furnish  a 
comprehensive  report  to  stockholders  or  as  a  ba- 
sis for  the  investigation  of  prospective  investors : 


EXHIBITS. 

**A"  Comparative  General  Balance  Sheet, 
showing  Assets  and  Liabilities  with  Increase  or 
Decrease  for  period. 

**B*'  Comparative  statement  of  Income,  and 
Profit  and  Loss  Accounts,  showing  percentage  of 
various  expenses  to  net  sales. 


CORPORATE   MANAGEMENT.  125 

SCHEDULES. 

No.  1.  Reconciliation  of  Bank  and  Cash  Book 
Balances. 

No.  2.    Accounts  Receivable — City  Customers. 

No.  3.  Accounts  Receivable — Country  Custo- 
mers. 

No.  4.    Accounts  Receivable — Sundry. 

No.  5.    Accounts  Receivable  in  Suspense. 

No.  6.    Bills  Receivable. 

No.  7.    Accounts  Payable — Purchase  Ledger. 

No.  8.    Accounts  Payable — Sundry. 

No.  9.    Bills  Payable. 

No.  10.  Comparative  Monthly  and  Yearly 
sales,  with  percentage  of  Increase  or  Decrease. 

No.  11.  Comparative  Statement  by  months,  of 
General  Expenses  for  Period. 

No.  12.     Stockholders  of  Record. 

Further  detailed  statements  may  be  furnished 
to  accomplish  the  purpose  desired,  at  the  same 
time  certain  schedules  referred  to  may  be  omitted 
within  the  limits  of  a  complete  audit. 

One  of  the  important  prerogatives  of  a  stock- 
holder in  a  corporation  is  his  right  to  examine 
the  books  and  records  of  the  corporation  in  which 
he  is  a  stockholder,  and  this  he  may  do  by  him- 
self, or  counsel,  at  any  and  all  reasonable  times 
and  for  all  legitimate  purposes. 

To  enable  him  to  avail  himself  of  this  privilege. 


126  COEPOKATE   MANAGEMENT. 

the  law  will  compel  the  officers  of  a  corporation  to 
permit  such  examination  and  award  damages  for 
its  denial. 

The  extent  to  which  this  examination  may  go 
is  limited  by  the  circumstances  of  the  particular 
case,  the  laws  of  the  State  where  the  corporation 
is  created,  and  often  depending  upon  the  nature 
and  extent  of  the  business,  as  well  as  its  condi- 
tion. 


REORGANIZATION  AND  CONSOLIDA- 
TION  OF  ENTERPRISES 


Frank's  "Science  op  Oeganizatiom/ »  etc. 


CHAPTER  IV. 

EEORGANIZATION  AND  CONSOLIDATION  OF 
ENTERPRISES. 

Reorganization  —  Possible  Ad-      Consolidation  of  Enterprises, 
vantages  Therefrom.  Stock-Jobbing. 

Reorganiza-  The  title  Selected  for  this  impor- 
AdVln*t*aBM  ^^^^  subject  pie-supposes  the  exis- 
Therefrom.  tencc  of  two  neccssary  conditions; 
First,  that  the  business  has  been  organized,  either 
as  a  corporation  or  otherwise;  and,  second,  that 
for  some  reason  it  is  deemed  necessary  or  advis- 
able to  change  its  status — that  is,  the  manner  of 
doing  business,  if  not  its  very  foundation  and 
conditions.  The  manifold  advantages  of  a  cor- 
porate existence,  as  compared  with  the  unincor- 
porated, and  the  mode  of  accomplishing  this  ob- 
ject have  already  been  discussed;  and  the  oppor- 
tunity to  illustrate  one  of  the  chief  advantages  to 
be  derived  from  the  corporate  idea,  as  compared 
with  the  unincorporated  existence,  is  here  pre- 
sented. 

Under  a  preceding  head  many  of  the  common 
causes  for  reorganization  have  been  given,  and  in 
discussing  the  various  practical  questions  arising 

129 


130  BEOBGANIZATION  AND  CONSOLIDATION. 

in  the  course  of  the  organization  and  conduct  of 
business  corporations,  the  advantages  and  meth- 
ods of  accomplishing  this  result  have  necessarily 
been  suggested.  At  the  same  time  a  separate  dis- 
cussion of  the  subject  of  reorganization  and  its 
possible  advantages  to  the  established  business, 
as  well  as  to  its  owners,  is  necessary  in  order  that 
many  of  the  principles  and  advantages  discussed 
may  be  illustrated  and  applied. 

A  business  venture  which  has  failed  to  attain 
success  may  often  be  reorganized  in  such  a  way 
as  to  give  it  the  vitality  it  requires,  and  the  lack 
of  which  has  been  the  cause  of  its  failure.  For 
instance,  a  business  which  has  struggled  along 
under  a  faulty  organization  in  the  first  instance, 
may  be  the  subject  of  successful  reorganization. 
This  faulty  organization  may  be  due  to  a  multi- 
tude of  causes,  such  as  a  failure  to  provide  suffi- 
cient capital,  or  a  practical  way  to  acquire  it; 
unfavorable  location,  either  of  the  business  it- 
self, or  an  unfavorable  State  for  the  creation  of 
the  corporation;  or  some  legal  defect  in  the  in- 
corporation itself. 

In  any  and  all  of  these  cases  the  opportunity 
for  success  and  rehabilitation  is  limited  only  by 
the  circumstances  of  the  particular  case,  and  the 
skill,  understanding  and  effort  of  the  reorganizer. 

It  is  only  where  the  business  itself  is  a  com- 
mercial disaster,  or  impossible  of  practical  ex- 


REORGANIZATION  AND  CONSOLIDATION  131 

ploitation,  that  failure  is  certain;  and  when  this 
fact  is  ascertainable  or  patent  from  an  honest 
and  scientific  examination,  it  is  then,  of  course, 
wise  to  abandon  the  undertaking  altogether. 

The  class  of  existing  and  going  concerns  which 
are  a  subject  of  reorganization,  and  where  the 
greatest  benefit  and  profit  may  be  derived  there- 
from, are;  First,  the  established  concerns  which 
are  making  abnormal  returns  on  the  capital  em- 
ployed; second,  where  it  is  the  desire  of  those 
interested  in  the  permanency  and  continued  suc- 
cess of  the  business  to  show  their  appreciation  of 
the  services  of  certain  employes,  such  as  depart- 
ment heads,  and  to  afford  them  recognition  in  the 
business  itself. 

What  is  meant  by  **  abnormal  returns  from  the 
capital  employed''  is  the  accumulation  of  net 
profits  annually  beyond  the  recognized  earning 
power  of  money;  that  is,  what  would  be  a  fair 
rate  of  interest  if  the  amount  employed  in  the 
business  was  invested,  and  similar  security  was 
given  for  the  repayment  of  the  principal  and  in- 
terest. If  the  profits  of  a  business  in  reality 
average  in  excess  of  this  amount,  some  action 
should  be  taken,  either  to  reorganize  the  busi- 
ness so  as  to  increase  the  stock  holdings  of  the 
owners  of  the  business,  or  if  the  business  con- 
ditions will  permit,  increase  the  capital  stock 
and  thereby  arrange  to  bring  the  earning  capacity 


132  KEORGANIZATION    AND   CONSOLIDATION. 

and  the  relative  holdings  of  the  members  into 
harmony. 

It  is  the  universal  experience  of  all  that  the 
sale  of  unlisted  stocks  can  hardly  be  made  above 
par ;  and  if  the  stock  has  an  earning  power  greater 
than  the  legal  rate  of  interest  it  is  in  reality  worth 
above  par. 

The  second  class  has  to  do  with  the  questions 
of  value  and  also  that  of  management.  Many 
going  concerns  have  been  placed  in  the  hands  of 
department  managers  by  allowing  them  to  have 
a  great  or  small  stock  interest;  and  this  has  been 
found  very  satisfactory  to  all  concerned,  in  the 
majority  of  cases. 

By  properly  re-valuing  the  business  that  has 
been  established,  this  object  can  be  accomplished 
with  comparatively  little,  if  any,  financial  sacri- 
fice by  the  owners.  For,  invariably,  the  ordinary 
employe  will  exert  a  greater  amount  of  effort,  and 
manifest  a  different  kind  and  degree  of  interest 
in  a  business  in  which  he  has  a  financial  interest ; 
and  in  consequence,  the  business  will  produce 
greater  results,  and  the  earning  capacity  and  value 
of  the  stock  will  be  proportionately  increased. 

The  following  case  will  show  many  of  the  ad- 
vantages, as  well  as  the  errors,  that  may  occur  in 
the  reorganization  of  a  business,  and  at  the  same 
time  serve  as  an  illustration  of  many  of  the  prin- 
ciples announced. 


REOEGANIZATION  AND  CONSOLIDATION.  133 

A  and  B  were  the  originators  of  a  manufactur- 
ing business  which  they  had  established  and  lo- 
cated in  a  suburban  town.  The  business  grew 
from  a  mere  shop  until  it  became  an  important 
factor  in  their  line  of  trade.  Finally  they  de- 
cided to  ** incorporate  the  business*'  and  to  that 
end  formed  a  corporation — The  A  &  B  Company 
— and  capitahzed  it  for  $200,000.  Upon  taking 
the  inventory  of  the  assets  (the  first  ever  made) 
it  was  found  that  a  conservative  estimate  of  the 
value,  which  included  the  factory  site  of  ten  acres 
of  valuable  land,  was  in  the  neighborhood  of 
$180,000;  besides,  the  bills  and  accounts  receiv- 
able and  cash  on  hand  amounted  to  about  $100,000 
additional.  Inasmuch  as  A,  B  and  C  (B's  son-in- 
law)  would  own  all  of  the  stock  of  the  corporation 
to  be  formed,  they  considered  it  immaterial  that 
the  value  placed  upon  the  assets  so  greatly  ex- 
ceeded the  capitalization,  and  transferred  the 
property  to  the  new  corporation  in  exchange  for 
its  capital  stock. 

In  about  three  years  A  died  and  it  became  nec- 
essary in  the  administration  of  his  estate  to  sell 
his  stock  in  the  A  &  B  Company.  The  corporate 
books  showed  an  average  net  earning  for  the  three 
years  of  about  9%  on  the  capitalization  and  tan- 
gible assets  aggregating  about  $290,000.  But  not- 
withstanding this  favorable  showing,  it  required 
diligent  effort  under  the  circumstances  to  find  a 


134  EEORGANIZATION  AND  CONSOLIDATION. 

purchaser  for  all  of  A*s  stock  at  par.  D,  a  banker, 
was  the  purchaser,  and  he  bought  A's  stock  as  an 
investment. 

The  entire  capital  stock  of  the  A  &  B  Company 
was  now  owned  by  B,  C,  and  D,  the  banker.  B  was 
getting  along  in  years  and  desired  to  retire  from 
active  business  life.  C  was  an  ** office  man''  and 
not  familiar  with  the  manufacturing  details  of 
the  business,  and  as  before  stated,  D  was  other- 
wise engaged  and  had  no  experience  in  or  desire 
to  become  actively  identified  with  the  manufac- 
turing end.  Finally  it  was  decided  to  give  three 
of  the  old  employes  an  opportunity  to  become 
financially  interested  in  the  business  and  to  make 
them  officers  of  the  corporation  as  well. 

Upon  due  consideration  it  was  not  found  ad- 
visable to  reorganize  the  corporation  and  adjust 
the  values  and  property  rights  of  those  already 
interested  in  order  that  the  new  members  might 
be  admitted  and  place  the  business  in  a  permanent 
and  practical  form  for  future  operations. 

The  new  corporation  was  capitalized  at  $350,000, 
and  the  plant,  tangible  assets  and  good  will  of  the 
A  &  B  Company  were  transferred  to  it  in  exchange 
for  $315,000  of  its  stock.  The  three  employes 
named  were  then  sold  outright  $2,000  each  of  the 
new  stock  at  par  and  given  a  contract  whereby 
they  would  receive  an  increase  in  salary  amount- 
ing to  $8,000  each,  to  be  accumulated  inside  of  a 


BEORGANIZATION  AND  CONSOLIDATION.  135 

given  period  should  they  remain  in  the  company 's 
employ  during  that  time,  and  to  have  stock  issued 
to  them  annually  in  lieu  of  money  for  such  yearly 
increase. 

The  former  factory  site  was  then  sold  for 
$40,000  cash  and  a  new  location  with  twenty-five 
acres  of  land  was  obtained  as  a  bonus  from  a 
town  (more  favorably  located)  where  such  a  man- 
ufacturing industry  was  desired.  The  plant  was 
modernized  and  enlarged  with  the  proceeds  of  the 
sale  of  the  former  factory  site  and  the  business 
was  then  reorganized  upon  a  more  modern  prac- 
tical basis. 

As  a  result  of  this  reorganization,  B  nad 
$140,000  of  stock  in  the  new  corporation;  C 
$25,000 ;  D  $150,000,  and  the  three  employes  had 
$2,000  each  issued  to  them.  This  left  $29,000  of 
unissued  stock  in  the  treasury,  $24,000  of  which 
would  be  transferred  to  the  employes  named  as 
an  increase  of  salary  and  to  create  a  personal 
interest  among  those  charged  with  the  actual  op- 
eration of  the  plant. 

At  the  expiration  of  some  two  years  the  entire 
stock  of  this  new  corporation  was  purchased  by 
a  syndicate  of  capitalists  for  the  purpose  of  turn- 
ing it  over  to  a  **  trust*'  in  that  line  at  25%  above 
the  par  value.  The  inventory  that  was  then  made 
and  the  earning  statement  for  the  period  showed 
that  the  net  profits  of  the  business  were  about 


136  REOKGANIZATION  AND  CONSOLIDATION. 

lll^%  on  the  increased  capitalization,  as  against 
9%  on  the  old,  and  this  with  the  same  business 
and  practically  the  same  management. 

Another  illustration  presenting  a  different 
phase  of  the  question  involved  is  where  two  sepa- 
rate and  competing  corporations  (which  for  con- 
venience will  be  designated  as  A  Company  and  B 
Company)  decided  to  join  forces  and  interests 
under  one  head.  To  accomplish  this  purpose  A 
Company  changed  its  name  to  include  that  of  the 
B  Company  and  increased  its  capital  stock  so  as 
to  permit  the  purchasing  of  the  business  of  B 
Company  with  such  increased  stock.  The  various 
stock  and  financial  complications  and  entangle- 
ments of  both  corporations  were  of  such  a  nature 
that  the  new  consolidation,  when  accomplished, 
presented  an  object  lesson  of  many  of  the  most 
troublesome  conditions  to  be  met  with  in  corpo- 
rate affairs. 

The  working  capital  proved  to  be  insufficient 
and  the  increased  stock  remaining  in  the  treasury 
was  offered  for  sale.  Many  prospective  pur- 
chasers were  found,  but  upon  investigation  into 
the  complicated  conditions  of  the  company's  or- 
ganization and  affairs  they  all  declined  to  pur- 
chase the  stock  in  the  treasury.  Finally  (and  as  a 
last  resort),  the  stock  was  offered  to  the  customers 
and  employes  of  the  surviving  corporation  and 
much  of  it  was  sold  on  *^easy  payments''  or  on 


REORGANIZATION   AND  CONSOLIDATION.  137 

installments,  with  the  result  that  after  struggling 
along  for  less  than  a  year  a  complete  reorganiza- 
tion was  found  necessary  and  undertaken. 

The  conditions  that  confronted  the  reorgani- 
zers  may  be  included  in  the  following  general 
statements,  viz.:  faulty  organization  of  A  Com- 
pany and  inflated  valuation  of  assets,  both  at  the 
inception  of  the  two  undertakings  and  at  the  time 
of  taking  over  B  Company  ^s  property  by  A  Com- 
pany; stock  hypothecated  as  collateral  for  indi- 
vidual loans  of  stockholders;  dividends  had  been 
declared  which  impaired  the  capital;  the  corpo- 
rate records  had  not  been  properly  kept  and  the 
by-laws  had  never  been  adjusted  to  meet  condi- 
tions existing  after  the  consolidation ;  much  of  the 
increased  stock  had  not  been  paid  for  and  no 
means  could  be  found  of  enforcing  such  payments ; 
the  stock  of  the  company  was  scattered  to  the 
**four  winds'*  and  much  of  it  could  not  be  ob- 
tained for  reorganization  purposes;  a  large  list 
of  creditors  were  insisting  upon  payment  of  their 
claims;  a  *^ blanket  mortgage'*  had  been  given  the 
bank  to  secure  it  for  current  financial  accommo- 
dations, etc.  In  consequence,  failure  was  inevi- 
table, and  what  in  reality  was  a  profitable  and 
promising  industry  became  a  fit  subject  for  a 
court  of  bankruptcy,  where  the  same  was  sold  in 
bulk,  and  thereafter  became  successfully  reor- 
ganized by  eliminating  practically  all  of  the  stock- 


138  EEOKGANIZATION   AND   CONSOLIDATION. 

holders  of  botli  A  and  B  Companies,  which  meant 
a  total  loss  to  them. 

Innumerable  examples  could  be  given  similar 
in  result  if  not  in  conditions  to  those  here  re- 
ferred to,  but  due  consideration  for  the  size  of 
this  volume  will  not  permit  further  illustration. 
Besides,  the  important  underlying  general  prin- 
ciples are  all  that  can  be  given  or  illustrated  in  a 
science  which  (as  here)  has  to  deal  with  all  the 
varied  circumstances  and  conditions  of  business 
life. 


c  o  n  8  o  1  i-       In  our  modern  system  of  promot- 

dation    of    En-    .  -,      ■,        .  n  .  . 

terprises.  mg    and    busmess-financmg,    little 

attention  is  given  to  the  question  of  consolidation 
of  corporations  as  such.  Nearly  all  of  the  States 
have  enabling  statutes  providing  for  the  consoli- 
dation of  corporations  of  the  same  kind  and  en- 
gaged in  the  same  general  business — carried  on  in 
the  same  vicinity.  It  is  usual  to  limit  such  con- 
solidations as  here  stated,  and  also  to  further  re- 
strict them  in  the  number  of  companies  that  may 
avail  themselves  of  such  privileges.  This  has 
been  done  to  prevent  the  formation  and  creation 
of  ** trusts  and  combines,"  in  restraint  of  trade. 

These  safeguards  and  restrictions  have  simply 
suggested  a  more  practical  and  advantageous 
method  of  accomplishing  the  same  or  similar  re- 


EEORGANIZATION   AND   CONSOLIDATION.  139 

suit,  namely,  to  organize  a  new  and  independent 
corporation,  and  to  then  purchase  outright  such 
rival  industries  as  may  be  desired;  and  in  many 
instances,  stocks  and  bonds  of  the  new  corpora- 
tion, or  the  proceeds  of  their  sale^  have  been 
used  in  payment  for  those  rival  plants. 

Then,  again,  it  is  not  unusual  for  one  rival  cor- 
poration to  increase  its  capital  stock,  and  to  then 
purchase  outright  the  plant  of  a  rival,  and  to  issue 
in  payment  therefor,  the  stock  of  the  purchasing 
company,  or  to  use  the  proceeds  cf  its  sale  for 
that  purpose. 

These  plans,  and  others  similar,  have  almost 
entirely  superseded  the  actual  consolidation  of 
corporations  under  statutory  authority  and  re- 
strictions ;  and  any  extended  reference  to  the  plan 
would  but  involve  a  discussion  of  the  litigation 
which  has  resulted  from  its  adoption. 

Railroad  companies  are  an  exception  in  the  use 
of  the  actual  consolidation  method,  for  the  reason 
that,  where  there  is  no  competition,  liberal  laws 
are  uniformly  enacted  for  this  purpose,  and  this 
on  account  of  their  public  character  and  supposed 
benefit  to  the  public;  and  the  tendency  in  this  re- 
gard is  to  further  encourage  them  to  consolidate. 

Notwithstanding  the  public  sentiment  which  un- 
questionably still  exists  against  consolidation  (or 
reorganization  for  this  purpose),  the  legitimate 
advantages  that  are  derived  therefrom  are  now 


140  REORGANIZATION  AND  CONSOLIDATION. 

apparent  to  those  who  are  at  all  familiar  with 
such  matters,  and  it  deserves  consideration  from 
an  economic  point  of  view,  as  well  as  from  a  sen- 
timental or  personal  standpoint. 

It  has  been  aptly  said  that  an  ideal  social  con- 
dition would  be  that  in  which,  in  every  department 
of  industry,  there  should  be  one  great  corporation 
working  with  its  possible  economies  and  com- 
pelled to  give  to  the  public  the  full  benefit  of  those 
economies,  and  to  accept  in  return  a  reasonable 
rate  of  interest  upon  the  actual  capital  employed. 

While  it  will  be  universally  conceded  that  such 
a  condition  does  not  yet  exist,  it  must,  however, 
be  admitted  that  the  public,  employer,  and  em- 
ploye have  almost  universally  derived  substan- 
tial advantages  from  the  majority  of  consolida- 
tions which  have  heretofore  taken  place.  And  it 
may  safely  be  expected  that,  with  a  more  intimate 
acquaintance  and  understanding  of  these  ques- 
tions by  the  public,  and  a  reasonable  State  or 
National  control  over  great  industrial  combina- 
tions, a  practical  solution  of  the  *^ trust  abuses'' 
will  be  at  hand;  i,  e.,  welcome  centralization,  but 
repress  total  monopoly — extortion. 

It  is  doubtful  when  and  where  the  advantage 
of  monopoly  in  business  was  first  discovered ;  cer- 
tainly few  successful  enterprises  have  been  found 
where  the  element  is,  or  has  ever  been  wholly 
absent.     It  will  be  found  to  exist  in  some  form 


REORGANIZATION  AND  CONSOLIDATION.  141 

or  other,  either  in  the  shape  of  patents,  trade- 
marks, trade  names,  or  peculiar  characteristics 
and  features  adopted  by  the  manufacturer  of  an 
article  of  trade  which  distinguishes  it  from  all 
others  of  a  similar  nature.  These  and  other  spe- 
cies of  monopoly  are,  and  have  been,  the  common 
objects  of  all  successful  enterprises. 

One  might  as  well  undertake  to  compete  with  a 
rival  up-to-date  manufacturing  concern  without 
the  aid  of  any  of  the  modern  machinery  or  fa- 
cilities commonly  employed  as  to  wholly  disre- 
gard the  advantages  that  may  be  derived  from  a 
reasonable  centralization  of  effort  and  capital. 

The  statutes  of  the  State  must  be  strictly  fol- 
lowed in  effecting  a  consolidation  of  corporations ; 
and  in  case  the  plan  of  reorganization  or  re-in- 
corporating is  adopted,  what  has  been  said  in 
relation  to  the  subject  elsewhere  will  apply  as 
well  here,  and  therefore  need  not  be  repeated. 

There  is  always  present  the  important  ques- 
tions of  plans  of  procedure^  etc.,  which  have  been 
referred  to  throughout,  and  they  should  engage 
the  particular  attention  of  an  experienced  corpo- 
ration lawyer. 

It  is  frequently  important  that  a  corporation 
should  be  legally  and  formally  dissolved  upon  the 
sale  of  all  its  assets  to  a  rival  corporation,  or  to 
one  formed  for  the  purpose  of  consolidation. 

A  corporation  can  only  be  dissolved  by  expira- 


142  KEORGANIZATION  AND  CONSOLIDATION. 

tion  of  a  time  limit  for  corporate  existence 
granted  in  the  charter  (and  in  some  States  sev- 
eral years  thereafter) ;  by  decree  of  a  court  of 
competent  jurisdiction;  by  voluntary  act  of  the 
corporation  itself  in  accordance  with  forms  pre- 
scribed by  the  laws  of  the  State  of  its  creation, 
and  where  the  charter  is  granted  directly  by  the 
Legislature  of  a  State,  it  may  be  repealed  and 
annulled  by  such  Legislature. 

It  is  sometimes  prescribed  by  statute  (as  in 
Illinois)  that  the  failure  to  file  certain  reports 
with  the  Secretary  of  State  will  work  a  forfeiture 
of  the  charter,  or  that  the  Secretary  of  State  may 
arbitrarily  cancel  such  charter  upon  the  failure 
of  such  corporation  to  comply  with  the  acts  in 
question,  but  this  is  of  doubtful  legality,  unless 
in  accordance  with  the  Constitution  and  express 
wording  and  reservation  of  such  power  in  the 
statutes  creating  the  corporation. 

Unless  some  one  of  the  above  general  condi- 
tions has  been  complied  with,  the  corporation 
lives  on,  regardless  of  all  other  questions,  and 
the  subscribers  to  the  capital  stock,  or  stockhold- 
ers, may  be  called  upon  at  any  time  for  any  latent 
and  unintended  liability  that  may  exist  or  arise. 

The  statutes  of  the  various  States  prescribe 
the  mode  for  voluntary  dissolution  of  corporations 
and  these  must  be  strictly  followed.  They  usually 
require  the  consent  of  the  stockholders,  or  a  large 


EEORGANIZATION  AND  CONSOLIDATION.  143 

majority  of  them  (usually  two-thirds),  to  such 
dissolution,  and  that  the  question  shall  be  voted 
upon  formally  by  such  stockholders  at  a  meet- 
ing regularly  and  formally  called  in  accordance 
with  such  statutes. 


stock  Job-  The  most  conspicuous  abuse  of 
^*"8-  the   corporate  plan   of  conducting 

enterprises  is  the  creation  of  trusts  and  monopo- 
lies for  the  purpose  of  extortion  and  enforced 
subjugation.  Immediately  following  this  modern 
crime  against  society,  is  the  more  subtle  and  il- 
lusory perversion  of  the  opportunities  conferred, 
viz.,  ** stock-jobbing.*' 

The  motives  that  prompt  the  commission  of 
the  offense  first  above  referred  to  might  be  prop- 
erly denominated  greed  and  a  reckless  disregard 
for  the  rights  and  welfare  of  others;  while  the 
impulse  that  suggests  and  contributes  to  the 
achievement  of  the  latter  is  obviously  dishonesty. 

What  may  and  may  not  constitute  stock-jobbing 
is  a  relative  question,  but  the  meaning  of  the  term 
as  here  alluded  to  is  the  issuing  of  stock  for  ficti- 
tious or  grossly  inflated  values,  and  the  creation 
of  corporations  for  ulterior  purposes,  such  as  the 
collection  of  funds  from  the  sale  of  stock  for  the 
ostensible  purpose  of  promoting  an  enterprise, 


144  KEOKGANIZATION  AND  CONSOLIDATION. 

while  in  fact  the  money  thus  acquired  is  to  be 
used  for  the  personal  benefit  of  the  organizers 
themselves. 

Another  and  less  flagrant  class  of  transactions 
which  fall  within  the  definition  of  the  term  here 
considered  are  those  enterprises  which  are 
capitalized  for  an  exorbitant  and  unreasonable 
amount  for  various  reasons,  among  them  being 
the  desire  to  offer  the  stock  of  such  a  company  at 
a  discount  for  the  purpose  of  inducing  the  inex- 
perienced to  buy  it,  and  to  gratify  the  visionary 
individual  who  may  be  behind  the  enterprise. 

In  order  to  illustrate  the  possibilities  and  ef- 
fects of  issuing  stock  upon  fictitious  and  inflated 
values  of  property  transferred  to  the  corporation 
at  the  time  of  its  creation,  one  has  only  to  inves- 
tigate the  inside  history  of  many  (if  not  a  large 
majority)  of  our  large  industrial  enterprises 
formed  within  the  past  few  years,  and,  in  fact, 
many  of  our  railroads  are  reported  to  be  capital- 
ized *4n  the  air,''  so  to  speak.  In  1905  the  capi- 
tal stock  of  all  the  railroads  of  the  United  States 
amounted  to  $6,741,956,825,  and  the  total  liabili- 
ties, except  current  accounts  and  sinking  funds, 
amounted  to  $14,765,178,704.*  Should  these  fig- 
ures be  applied  to  an  individual  or  single  busi- 
ness enterprise  the  conditions  would  not  be  re- 

*  Figures  taken  from  Eeport  for  1905,  U.  S.  Bureau  of 
Statistics. 


BEORGANIZATION   AND  CONSOLIDATION.  145 

garded  with  favor  by  financiers,  for  while  the 
cost  or  value  of  properties  are  not  available  (ex- 
cept an  estimate  of  some  $12,000,000,000),  it  is 
assumed  that  the  total  amount  of  capitalization 
reflects  a  liberal  valuation  on  the  tangible  assets 
at  least  of  these  properties,  and  if  this  is  a  cor- 
rect premise,  then  the  chief  assets  are  the  fran- 
chises and  intangible  rights  which  depend  upon 
continued  operation  for  their  value.  In  brief, 
the  railroads  are  financed  upon  their  probable 
earning  capacity,  rather  than  upon  substance,  and 
while  this  might  reasonably  be  regarded  as  legit- 
imate and  proper  financing  in  this  class  of  en- 
terprises, if  the  same  principles  were  applied  to 
individual  industries,  they  would  be  regarded  as 
stock-jobbing. 

In  the  recent  combinations  of  industrial  enter- 
prises many  instances  may  be  found  where  the 
capital  stock  represents  a  generous  valuation  of 
the  properties  consolidated,  while  the  bonded  in- 
debtedness of  these  concerns  is  equal  to,  and  in 
many  cases  greater  than,  the  capitalization ;  hence 
if  both  bonds  and  stocks  have  been  sold  and  are 
outstanding  and  being  held  by  investors,  this 
form  of  property  represents  a  large  percentage  of 
our  present  floating  securities.* 

*  The  foregoing  having  been  recorded  in  1907,  subsequent 
events  and  disclosures  seem  to  justify  the  conclusions  announced, 
which  were  at  that  time  the  subject  of  adverse  criticisim. 


146  KEORGANIZATION  AND  CONSOLIDATION. 

The  foregoing  is  but  illustrative  of  the  abuses 
of  the  corporate  system  perpetrated  in  the  higher 
realm  of  financiering  for  the  purpose  of  drawing 
capital ;  and  the  ethical  responsibility  for  the  ulti- 
mate repayment  of  the  money  thus  secured  rests 
upon  those  who  have  inaugurated  the  plans 
adopted,  as  well  as  upon  those  who  have  know- 
ingly assisted  in  carrying  such  plans  into  effect. 

Where  financial  assistance  is  sought  in  every- 
day business  affairs  it  is  the  exception  rather  than 
the  rule  that  enterprises  are  able  to  acquire  such 
assistance  except  upon  establishing  their  financial 
merit,  and  this  must  be  based  upon  material 
wealth.  The  experienced  financier  would  not  re- 
gard with  favor  the  application  of  an  enterprise 
that  was  involved  in  a  bond  issue  to  the  extent  of 
its  responsibility,  when  viewed  from  the  material 
standpoint.  In  other  words,  the  principles  adopted 
by  **high  financiers,''  who  are  responsible,  for 
floating  the  securities  which  have  been  issued  by 
railroads  and  industrial  enterprises  within  the 
past  few  years,  would  not  be  the  basis  upon  which 
financial  assistance  could  regularly  be  obtained. 
While  a  more  liberal  rule  necessarily  obtains  in 
the  capitalization  of  enterprises  than  that  adopted 
by  banks  and  financiers  generally  in  extending 
commercial  credit,  still  the  basis  for  a  sane  valu- 
ation is  in  principle  the  same. 

It  is  not  the  purpose  here  to  condemn  or  de- 


REORGANIZATION  AND  CONSOLIDATION.  147 

fend  the  transactions  which  now  constitute,  in  a 
measure  at  least,  the  material  for  a  general  his- 
tory of  modern  American  finance,  but  to  illus- 
trate what  appears  to  be  erroneous  and  prejudi- 
cial theories  for  the  financial  foundation  of  a 
business  enterprise. 

We  must  assume  that  the  vast  majority  of  the 
business  of  the  future  will  be  transacted  by  and 
through  the  corporate  system,  and  it  would  seem 
that  in  the  light  of  recent  events  no  greater  serv- 
ice could  be  rendered  to  those  who  are  engaged  in 
the  *^game  of  business,'*  than  to  impress  them 
with  the  responsibilities  and  ultimate  conse- 
quences of  their  methods.  While  it  is  conceded 
that  the  moralists  are  the  individuals  most  con- 
cerned with  discourses  on  ethics  and  moral  senti- 
ment, still  no  vocation  can  wholly  disregard  ques- 
tions that  involve  its  reputation  as  a  respectable 
and  honorable  occupation. 

Business  is  now  the  principal  occupation  of  so- 
ciety; it  furnishes  the  means  of  livelihood,  and 
financial  as  well  as  social  advancement,  for  a 
great  majority  of  mankind.  In  the  process  of 
evolution,  which  business  is  now  and  necessarily 
must  continue  passing  through,  it  is  imperative 
that  those  who  are  concerned  about  its  future 
should  take  heed  of  certain  inevitable  conse- 
quences of  what  is  recognized  to  be  a  violation  of 
the  law  of  natural  right.    The  Socialist  now  sees 


148  KEORGANIZATION  AND  CONSOLIDATION. 

the  end  of  *^ class  privileges  and  individualism'' 
in  the  wake  of  our  present  commercialism;  while 
the  individualist  hopes  and  believes  that  only  the 
ethical  improvement  of  mankind  will  work  out 
the  destiny  of  this  modern  dominant  force. 

Social  scientists  tell  us  that  the  corporation  is 
fostering,  if  not  responsible  for  our  oppressive 
trusts  and  monopolies;  that  without  this  institu- 
tion we  would  have  free  competition  with  its  at- 
tending benefits.  On  the  other  hand,  these  same 
scientists  admit  that  competition  promotes  **  com- 
mercial cannibalism' ';  therefore,  it  may  be  seen 
that  any  attack  upon  a  system  of  accomplishing  a 
given  end  cannot  be  effective,  and  that  after  all, 
the  motives  of  the  individuals  rather  than  the 
system  under  which  they  operate  are  essentially 
of  controlling  importance. 

It  is  folly  to  lay  the  blame  of  unjust  or  op- 
pressive conduct  upon  corporations;  while  they 
are,  according  to  the  predominant  *^  fiction 
theory'',  a  legal  entity  they  are  without  moral  or 
mental  qualities — conscience,  feeling  or  moral  re- 
sponsibility— and  should  not  be  chargeable  with 
the  acts,  conduct  or  motives  of  their  stockholders, 
directors  or  officers  who  control  their  policies  and 
their  every  act;  and  no  system  of  laws  for  the 
national  or  state  control  of  corporations  will  make 
the  individuals  composing  them,  fair,  equitable  or 
just. 


REORGANIZATION   AND  CONSOLIDATION.  149 

The  subject  of  over-capitalization  has  already 
been  discussed ;  in  the  succeeding  chapter  further 
illustrations  are  given  of  this  and  other  abuses 
of  corporate  privileges  which  are  so  intimately 
connected  with  the  subject  in  hand. 


PROMOTION  OF  ENTERPRISES 


Frank's  "Science  or  Organization,*'  etc. 


CHAPTER  V. 

PROMOTION  OF  ENTERPRISES. 

Promoters.  Patents  and  Their  Commercial 

Promotion  Contracts.  Value. 

Good  Will  —  Trademarks  and     Mining  Enterprises. 
Trade  Names. 

Promotera.         According  to  Webster,  a  promoter 
is  **One  who  sets  on  foot  and  takes  the  preliminary 
steps  in  a  scheme  for  the  organization  of  a  cor- 
poration, a  joint  stock  company,  or  the  like.'' 
Assuming  this  definition  to  be  correct,  there  are 
few  men  who  have  not,  at  some  time  or  other, 
acted  the  part  of  a  promoter.    At  the  same  time, 
there  are  many  persons  who  would  resent  being 
called  a  promoter,  even  of  a  single  undertaking. 
This  prejudice  is  due  primarily  to  the  fact  that 
the  nature  and  opportunities  of  the  business  have 
attracted  so  many  visionary,  irresponsible  and 
(we  believe  we  are  justified  in  adding)  dishonest 
persons.     In  fact,  the  confidence  man  is  not  a 
stranger  to  this  field  of  activity. 

But  it  is  as  unjust  and  unwise  to  condemn  pro- 
moters as  a  class,  because  frequently  a  **  Colonel 

153 


154  PKOMOTION   OF  ENTEKPEISES. 

Sellers''  or  a  *^ confidence  man"  has  been  found 
among  them,  as  it  would  be  to  condemn  our  Na- 
tional currency  on  account  of  the  discovery  of  an 
occasional  counterfeit.  In  both  cases  the  spuri- 
ous is  more  frequently  discovered  among  the 
smaller  *^ denominations/'  and  the  reason  is  ap- 
parent. 

Promoting,  as  a  profession,  was  begun  in  Lon- 
don. A  prominent  publication  contained  the  fol- 
lowing interview  with  one  of  the  first  of  this  pro- 
fession to  attract  attention  in  the  field  of  con- 
solidating industrial  enterprises : 

**  Months  and  months  of  the  hardest  kind  of 
work  is  necessary  to  float  these  great  concerns. 
People  are  incredulous,  and  it  is  hard  to  win  them 
over.  Some  want  more  than  the  actual  value  of 
the  property  sought.  It  takes  more  than  ordinary 
persuasion  to  convince  holders  of  property,  stocks 
or  bonds  that  it  is  best  for  them  to  sell,  or  become 
a  party  to  a  project,  whatever  it  may  be. 

**I  take  hold  of  nothing  until  I  am  convinced 
that  success  is  certain.  I  then  interest  the  prac- 
tical men  of  the  different  concerns  to  be  consoli- 
dated ;  these  practical  men  agree  with  me  to  take 
three-fourths  of  the  stock.  Next,  I  interest  capi- 
talists in  the  remaining  one-quarter  of  the  stock. 
Only  those  who  are  best  adapted  are  put  at  the 
head  of  the  institution  as  officers  and  directors. 
That  insures  the  strictest  economy  and  highest 


PROMOTION   OF  ENTERPRISES.  155 

efficiency  in  the  management  of  affairs.  Then, 
after  the  company  has  been  floated,  I  keep  a  sharp 
watch  over  operations. 

**I  have  turned  down  dozens  of  offers  for  my 
services  in  promoting  new  companies." 

It  was  an  English  promoter  who  conceived,  or 
rather  demonstrated,  the  plan  of  consolidating  a 
number  of  properties  in  a  certain  line  of  manu- 
facture, without  the  necessity  of  money  entering 
into  the  transaction — at  any  rate,  to  any  con- 
siderable extent.  As  the  plan  has  been  adopted 
in  this  country  in  so  many  important  instances, 
it  is  deemed  worthy  of  attention. 

The  following  is  a  quotation  from  an  article 
appearing  in  a  leading  commercial  magazine,  pub- 
lished upon  the  first  ** exposure"  of  the  plan: 

**A  &  Company  were  manufacturers  of  shoes, 
and  their  business  showed  a  net  earning  capacity 
of  10%  on  the  estimated  value  of  their  plant, 
to-wit :  $1,000,000 ;  B  &  Company,  also  shoe  manu- 
facturers, showed  a  net  earning  capacity  of  7% 
on  the  value  of  their  plant,  to-wit:  $600,000;  C  & 
Company,  also  shoe  manufacturers,  showed  a  net 
earning  capacity  of  8%  on  the  value  of  their 
plant,  namely,  $400,000. 

*  *  D,  the  promoter,  succeeded  in  interesting  these 
three  companies  in  the  plan  of  consolidation,  and 
upon  its  consummation,  the  properties  were  all 
turned  in  at  the  valuations  named,  making  a  total 


156  PKOMOTION   OF  ENTERPKISES. 

of  $2,000,000,  with  the  average  earning  capacity 
of  8.7%  on  the  valuation  named. 

**A  bond  issue  was  created  on  these  properties 
of  $2,000,000,  and  the  capital  stock  of  the  cor-- 
poration  taking  over  the  properties  was  placed  at 
a  like  sum,  namely  $2,000,000. 

*^  One-half  of  this  capital  stock  was  made  pre- 
ferred stock,  6%  cumulative,  and  this  issue  and 
the  bonds  mentioned  were  all  turned  over  to  the 
various  corporations,  pro  rata,  in  full  payment 
for  the  plants,  and  the  parties  originally  owning 
the  plants  were  made  officers  and  directors  of 
the  new  corporation.  This  left  the  promoter  with 
$1,000,000  of  the  common  stock  of  this  combined 
aggregation  for  his  profit,  and  which,  it  is  unneces- 
sary to  say,  was  promptly  sold  to  the  unsuspecting 
public. ' ' 

Another  example,  and  one  nearer  home,  fur- 
ther illustrates  the  resourcefulness  of  human 
ingenuity:  A,  being  a  large  dealer  in  coal,  dis- 
covers a  series  of  mines  along  and  dependent  upon 
a  certain  railroad  for  shipping  facilities.  He 
conceives  the  idea  of  consolidating,  or  rather  buy- 
ing up  all  of  these  mines  and  making  them  the 
basis  of  a  large  corporation,  which  would  then  be 
in  a  position  to  control  the  output  of  these  prop- 
erties. His  first  step  was  to  get  an  option  on  all 
these  industries  at  a  price  as  near  their  reason- 
able value  as  it  was  possible  to  do.    In  addition  to 


^  PROMOTION   OF  ENTERPRISES.  157 

this,  he  acquired  options  on  most  of  the  available 
land  in  that  vicinity  that  was  supposed  to  contain 
coal,  or  could  be  utilized  for  the  purposes  he  had 
in  view. 

After  he  had  acquired  these  options,  he  ap- 
proached the  officials  of  the  railroad  company  re- 
ferred to,  and  undertook  to  interest  them  in  the 
project — ^making  clear  the  point  that  the  revenue 
from  the  traffic  of  these  mines  would  in  a  very 
short  time  pay  for  the  properties — and  incident- 
ally, that  the  same  traffic  would  support,  if  not 
materially  assist,  in  the  construction  of  a  compet- 
ing railroad  that  would  connect  with  another  large 
system  and  thereby  deprive  them  of  this  profitable 
traffic.  While  the  railroad  company  in  question 
did  not,  itself,  take  an  interest  in  this  project,  it 
was  by  or  through  the  assistance  of  the  officers 
of  this  road  that  the  deal  was  consummated  and 
the  options  taken  up,  and  working  capital  pro- 
vided, with  money  raised  by  a  bond  issue  upon  the 
properties  themselves.  As  a  result  of  this  trans- 
action, $1,000,000  in  first  mortgage  bonds  were 
floated,  and  $3,000,000  of  common  stock  was 
issued,  largely  for  the  intangible  assets  of  this 
corporation,  namely,  the  options  themselves, 
which  cost  A  in  the  neighborhood  of  $3,000  initial 
investment. 

Still  another  example  illustrates  the  more  dar- 
ing and  troublesome  class : 


158  PROMOTION   OF  ENTERPEISES. 

A,  B  &  C  organize  a  railroad  corporation  for 
the  ostensible  purpose  of  constructing  a  line  of 
road  to  a  distant  city.  They  have  an  elaborate 
prospectus  prepared,  showing  the  proposed  right 
of  way  and  trains  in  operation.  As  a  temptation 
to  the  investors,  they  show  the  enormous  gross 
earnings  of  some  ** competing  line''  and  others 
that  are  National  prides,  and  then  offer  the  stock 
of  this  phantom  road  at  a  ridiculously  low  figure 
^^for  a  limited  time  only;''  and,  as  a  still  further 
generous  concession,  they  propose  to  permit  small 
investors  to  acquire  a  block  of  this  stock  on 
easy  payments. 

Expensive  and  sensational  advertisements  are 
inserted  in  the  daily  press,  and  every  modern 
and  effective  method  of  reaching  the  wage-earner 
and  other  small  investors  is  adopted ;  with  the  re- 
sult that  enough  money  is  collected  from  the  in- 
ception to  continue  the  campaign  of  exploitation 
and  promotion. 

Now  the  real  purpose  of  the  scheme  is  put  into 
action,  namely,  the  payment  of  salaries  to  A,  B 
&  C,  and  this  is  continued  until  the  enthusiasm 
of  the  available  investors  is  exhausted. 

There  is  necessarily  a  certain  amount  of  actual 
development  work  done  to  aid  the  scheme  and  to 
bolster  up  a  plausible  defense  in  case  of  inter- 
ference upon  the  ground  of  fraud,  but  the  **  Rail- 
road" is  ever  in  contemplation  until  the  contribu- 


PROMOTION   OF  ENTERPRISES.  159 

tions  cease,  and  then  the  salvage  of  the  financial 
wreck  is  passed  along  into  the  hands  of  a  receiver 
for  distribution. 

These  examples  are  given  for  the  purpose  of 
illustrating  the  possibilities  for  great  financial 
gain  which  have  attracted  the  speculator  and 
unscrupulous  alike  to  this  profession. 


Promotion  Contrary  to  the  prevailing  notion, 

Contracts.  j-^^^  coutracts  of  promotcrs  are  not 

necessarily  confined  to  the  inception  of  a  busi- 
ness or  the  organization  of  a  corporation.  They 
may,  and  usually  do,  extend  into  the  initial  opera- 
tion of  the  enterprise,  at  least  to  the  extent  of 
raising  the  necessary  capital  and  **  putting  on 
foot^'  the  project  in  hand,  after  the  corporation  is 
formed;  and  for  this  reason,  their  acts  and 
responsibilities  may  cover  a  large  range  of 
conduct. 

Probably  the  questions  causing  the  most  con- 
troversy and  litigation  in  this  relation  arise  in 
connection  with  the  promoter's  compensation  or 
profit;  that  is,  how  he  can  lawfully  acquire  com- 
pensation for  his  services,  when  his  employment 
is  to  **set  on  foot  and  take  the  preliminary  steps," 
in  the  organization  or  reorganization  of  a  busi- 
ness project. 


160  PROMOTION  OF  ENTERPRISES. 

His  compensation  is  often  contingent  upon  the 
accomplishing  of  a  certain  end,  and  the  difficulty 
usually  encountered  is  to  ascertain  for  whom  he 
may  act,  and  to  whom  he  can  look  for  his  com- 
pensation. 

Assuming  that  the  business  with  which  he  is 
employed  is  to  be  conducted  by  a  corporation  to 
be  formed,  manifestly  he  cannot  bind  the  corpora- 
tion until  it  is  in  existence,  and  even  then  there  is 
some  difficulty  encountered  where  the  services 
were  rendered  prior  to  the  creation  of  the  cor- 
poration in  question. 

Some  States  have  statutes  providing  for  the 
payment  of  capital  stock  of  corporations  organized 
therein — in  services.  They  are  South  Dakota, 
North  Dakota,  Idaho,  Colorado,  West  Virginia, 
Delaware,  Maine,  and  a  number  of  other  States 
whose  laws  are  otherwise  deemed  unfavorable  to 
the  principles  announced. 

What  constitutes  *' services"  is  often  a  subject 
of  inquiry.  It  has  been  held  that  a  gift  of  stock 
to  a  promoter  is  illegal,  and  that  the  issuance  of 
stock  to  ** influential  persons''  for  the  use  of  their 
names,  is  equally  so.  But  the  issuance  of  stock 
by  corporations  created  by  any  of  the  above  named 
States  for  bona  fide  services  actually  performed, 
and  for  which  the  corporation  either  contracts,  or 
accepts  the  benefit  of  by  proper  resolution,  is 
legal. 


PROMOTION   OF  ENTERPKlSES.  161 

When  the  promoter  is  acting  for  parties  in 
interest  in  an  established  business,  where  it  is 
desired  to  reorganize  or  enlarge  the  same,  the 
safe  and  proper  method  is  to  contract  with  the 
parties  to  be  benefited  by  such  services,  for  a  per- 
centage of  the  stock  which  they  receive  in  pay- 
ment for  their  interest  in  the  enterprise.  Then, 
upon  the  transfer  of  the  business  in  question  to 
the  corporation  when  formed,  the  agreed  per- 
centage of  the  stock  issued  to  the  parties  in 
interest  for  their  share  in  the  business  enterprise, 
can  be  assigned  to  the  promoter,  and  in  that  way 
obviate  every  question  and  fulfill  every  require- 
ment. 

The  relation  of  the  promoter  to  the  corporation 
is  usually  fiduciary,  and  in  consequence,  his  acts 
and  duties  in  dealing  therewith  are  governed  by 
the  rules  of  law  pertaining  to  that  relation 
generally. 

For  a  general  consideration  of  the  subject  in 
hand  the  rights  and  obligations  of  the  parties  will 
be  classified  as  follows :  The  duties  and  responsi- 
bilities of  the  promoter  (a)  to  his  client;  (b)  to 
the  subscribers  of  stock;  (c)  to  the  corporation 
promoted,  and  (d)  to  the  stockholders  after 
organization ;  then,  the  reciprocal  duties  and  obli- 
gations of  (e)  the  client  and  (f)  the  corporation 
to  the  promoter. 

The  duties  and  liabilities  of  the  promoter  to  the 


162  PROMOTION   OF  ENTERPRISES. 

client  are  generally  based  upon  contract,  either 
express  or  implied,  depending  upon  the  circum- 
stances of  the  particular  case. 

Generally  speaking,  the  promoter  is  held  to  a 
very  high  standard  of  conduct,  as  he  usually  occu- 
pies a  relation  of  trust  and  confidence ;  and  when- 
ever the  question  of  his  loyalty  is  involved  the 
burden  is  upon  the  promoter  to  establish  the 
utmost  good  faith  and  fairness  in  all  his  dealings 
with  the  client. 

He  may  not  acquire  any  secret  advantage  over 
his  client  by  reason  of  his  employment;  and  he 
is  in  many  respects  charged  with  the  same  degree 
of  responsibility  as  an  attorney  at  law. 

The  promoter  *s  duties  and  liabilities  to  the  sub- 
scriber of  stock  of  the  corporation  frequently 
arise  through  representations  made  by  him  either 
in  the  prospectus  or  otherwise,  before  incorporat- 
ing. The  rule  is  well  established  that  he  is  per- 
sonally liable  for  any  misrepresentations,  and  for 
withholding  important  information  which  the  cir- 
cumstances of  the  particular  case  make  it  his  duty 
to  disclose. 

It  is  not  moral  obligations  that  the  promoter 
is  liable  for ;  but  where  it  is  necessary  for  him  to 
disclose  important  facts  to  enable  the  subscriber 
of  stock  to  determine  whether  or  not  he  will 
become  interested  in  the  proposed  corporation, 
failure  to  disclose  will  render  the  promoter  liable 


PROMOTION   OF  ENTERPRISES.  163 

to  such  subscribers  for  any  damages  resulting 
from  his  silence.  In  other  words,  intentional  with- 
holding of  information  may  be  equivalent  to  mis- 
representation. 

The  liability  of  a  promoter  to  the  corporation 
may,  under  appropriate  circumstances,  be  gov- 
erned by  the  same  rules  as  those  applicable  to  his 
relation  to  the  client.  If  the  promoter  places  him- 
self in  a  position  of  trust  to  the  corporation,  he 
is  charged  with  all  the  responsibilities  of  that  rela- 
tion generally. 

This  responsibility  invariably  attaches  where 
he  is  looking  to  the  corporation  (when  formed) 
for  his  compensation,  and  where  he  is  to  be  reim- 
bursed for  his  expenses  by  it ;  and  it  has  been  said 
that  the  test  of  his  responsibility  is:  W^as  he 
benefited  by  the  incorp oration?  In  any  event  he 
is  bound  to  exercise  good  faith,  and  if  he  after- 
ward acts  for  the  corporation  in  securing  capital, 
either  from  the  sale  of  its  stock  or  otherwise,  he 
thereby  becomes  its  agent  and  will  not  be  per- 
mitted to  acquire  any  secret  personal  advantage 
through  such  employment. 

The  most  common  source  of  disagreement  and 
consequent  litigation  is  where  the  promoter  is 
personally  interested  in  the  property  conveyed 
to  the  corporation  at  the  time  of  its  formation. 
In  such  a  case  the  promoter  is  obliged  to  see  that 
the  property  conveyed  is  fairly  valued  as  well  as 


164  PEOMOTION   OF  ENTEEPKISES. 

fairly  acquired  by  the  corporation — that  is,  he 
must  see  to  it  that  a  disinterested  Board  of 
Directors  pass  upon  the  value  of  the  property 
conveyed  by  him,  and  that  it  also  is  to  the  interest 
of  the  corporation  to  acquire  such  property. 

This  does  not  mean  that  the  promoter  may  not 
make  a  profit  on  property  sold  to  a  corporation 
which  he  is  forming,  but  it  does  mean  that  he  may 
not  make  a  secret  profit  therefrom.  It  is  his  duty 
to  disclose  to  his  corporation  that  he  is  profiting 
by  the  transaction,  or  in  any  event  he  must  not 
conduct  himself  so  as  to  lead  the  directors  to 
believe  that  he  is  not  so  doing. 

The  promoter  of  a  corporation  who  becomes  an 
officer  thereof  on  its  formation  is  in  consequence 
to  be  treated  as  its  agent  and  trustee,  and  is 
accountable  to  the  corporation  for  any  secret 
profits  which  he  may  realize  upon  property  bought 
for  or  sold  to  the  corporation. 

In  order  to  charge  one  with  the  responsibilities 
above  referred  to,  it  is  often  a  question  as  to  who 
is  or  is  not  a  promoter.  To  constitute  one  a  pro- 
moter of  a  corporation  it  must  be  shown  that  he 
was  acting  for  and  on  behalf  of  the  corporation,  or 
that  he  assumed  so  to  act ;  and  that  on  the  strength 
of  such  authority  or  assumed  agency,  the  party 
complaining  dealt  with  him  upon  such  under- 
standing. 

The  duties  of  the  promoter  to  the  stockholders 


PKOMOTION   OF  ENTERPRISES.  165 

of  a  corporation  after  it  is  incorporated  are 
usually  that  of  an  agent.  However,  the  promoter 
may  be  liable  to  all,  or  a  part  of  the  stockholders, 
for  a  separate  accounting  to  them,  where  his 
course  of  dealing  has  placed  him  in  the  position 
of  a  partner  at  the  inception  of  the  undertakings ; 
that  is,  where  he  has  secured  the  co-operation  of 
all  or  a  certain  number  of  the  stockholders  upon 
the  representation  that  they  were  to  share  equally 
with  him  in  the  profits  of  the  undertaking,  in  such 
a  case  he  is  liable,  of  course,  as  a  partner;  and 
the  right  of  action  is  based  more  upon  the  right 
of  a  co-partner  than  that  of  a  stockholder. 

Where,  however,  the  wrongs  of  the  promoter 
are  in  the  representations  made  alike  to  all,  in 
relation  to  the  corporation  or  its  property  or 
intentions,  the  right  of  action  must  necessarily  be 
maintained  by  the  corporation,  and  not  by  the 
stockholders. 

The  reciprocal  duties  and  liabilities  of  the  client 
to  the  promoter  are  usually  regulated  by  contract, 
either  express  or  implied,  and  those  of  the  cor- 
poration to  the  promoter  depend  largely  upon  the 
circumstances.  If  he  is  acting  directly  for  the 
corporation,  its  responsibilities  to  him  are  to  reim- 
burse him  for  his  services,  and,  as  before  stated, 
if  the  corporation  was  not  in  existence  at  the  time 
the  services  were  performed,  if  it  afterward 
adopts  the  acts  of  the  promoter,  or  accepts  the 


166  PROMOTION   OF  ENTEEPRISES. 

benefits  of  his  work,  it  is  liable  to  him  for  the 
reasonable  value  thereof. 

If  the  statutes  of  the  State  under  which  the 
corporation  is  organized  provide  for  a  subsequent 
payment  by  it  of  the  costs  and  expenses  of  incor- 
porating, then,  of  course,  he  may  recover  for 
such  expenses  incurred  in  bringing  the  company 
into  existence. 

Where  a  promoter  acts  for  a  corporation  thafc 
is  to  be  formed,  his  contracts  are  similar  to  those 
of  an  agent  generally  under  similar  circum- 
stances; and  if  the  principal  (the  proposed  cor- 
poration) is  never  brought  into  existence,  there  is 
no  remedy  for  those  who  have  dealt  with  the 
promoter  upon  un-executed  contracts  made  in 
that  way;  but  it  must  clearly  appear  that  the 
promoter  is  acting  for  a  corporation  to  be  formed, 
or  he  will  be  personally  liable  upon  such  con- 
tracts. 

Of  course,  where  money  or  property  has  been 
turned  over  to  a  trustee,  or  to  the  promoter,  upon 
such  contracts  as  are  here  referred  to,  a  different 
rule  applies,  and  the  prospective  stockholder  may 
have  appropriate  relief  in  case  the  corporation  is 
never  formed. 

Among  the  important  promotion  contracts  are 
those  relating  to  the  subscription  to  capital  stock, 
as  well  as  bonds  or  other  securities,  made  at  or 
before  the  complete  organization  of  the  corpora- 


PROMOTION   OF  ENTERPRISES.  167 

tion,  or  the  taking  over  of  tangible  property  in 
exchange  for  its  stock  or  bonds,  and  this  sub- 
ject is  so  intimately  connected  with  that  of  under- 
writing and  guaranteeing  such  issues  that  they 
will  be  considered  here  and  in  the  inverse  order 
named. 

Underw^riting  stock  or  bonds  means  simply  to 
subscribe  for  a  certain  portion  or  the  entire  issue, 
upon  the  agreement  that  payments  shall  be  made 
at  some  future  date  or  on  installments,  and  at  a 
price  usually  below  par.  Such  contracts  are 
necessarily  made  with  banks  and  other  financial 
institutions,  syndicates  or  financiers  of  recognized 
ability  and  standing,  who  are  not  only  able  to  dis- 
pose of  such  securities  but  to  pay  for  them,  even 
if  they  are  not  sold  at  the  time  specified  in  the 
underwriting  agreement  w^hen  such  payments  are 
to  be  made. 

The  advantages  to  the  corporation  from  such 
a  contract  are  many,  the  principal  ones  being  the 
assurance  of  ready  working  capital  at  all  events, 
the  prestige  of  a  well-known  distributer  of  securi- 
ties, the  services  of  experienced  financial  agents, 
and  a  ready  market. 

The  underwriter  of  such  securities  has  also 
special  facilities  for  ascertaining  the  responsi- 
bility of  the  institution  issuing  the  securities 
offered,  and  the  general  investing  public  are  aware 
of  that  fact  and  therefore  more  readily  influenced 


168  PROMOTION   OF  ENTERPEISES. 

by  the  representations  of  such  underwriters  con- 
cerning the  merit  and  value  of  the  investment. 

Many  issues  of  such  securities  are  underwritten 
by  financial  institutions  without  the  investment 
of  any  considerable  portion  of  the  value  of  the 
securities  underwritten,  as  they  are  usually  sold 
to  the  general  investor  before  the  payments  by 
the  underwriter  become  due;  and  his  profit  is 
usually  the  difference  between  the  price  he  con- 
tracts to  pay  for  the  entire  issue  and  whatever 
may  be  realized  from  the  sale  to  the  investing 
public,  and  this  varies  according  to  the  character 
of  the  investment,  and  the  probability  of  their 
ready  sale. 

Guaranteeing  stocks  and  bonds,  as  the  term 
implies,  insures  the  value  and  payment  of  the 
issue  or  portion  thereof  to  the  investor.  Such  an 
undertaking  is  usually  to  guarantee  that  stocks 
will  not  pay  less  than  a  certain  specified  dividend 
during  a  certain  period,  or  that  bonds  will  be  paid 
in  full  at  maturity.  Analogous  to  this  is  what  is 
termed  the  *  Hrust-f und '  *  plan,  which  is  also 
designed  for  the  protection  of  investors,  or  pro- 
fessedly so,  but  it  is  so  little  in  actual  legitimate 
use  as  not  to  merit  discussion. 

The  organizers  of  the  corporation  are  all  con- 
sidered in  law  as  its  promoters  and  their  con- 
tracts as  subscribers  to  the  capital  stock  of  the 
corporation  to  he  formed  for  any  lawful  purpose 


PKOMOTION   OF  ENTERPRISES.  169 

are  binding,  as  being  based  upon  the  considera- 
tion of  their  mutual  agreements  to  take  such  stock 
when  the  corporation  is  formed,  and  each  sub- 
scriber will  be  liable  to  the  other  subscribers  for 
his  failure  to  carry  out  his  subscription.  In  addi- 
tion to  his  liability  to  the  other  subscribers,  a 
further  liability  to  the  corporation  itself,  as  well 
as  to  its  creditors,  accrues  as  soon  as  the  charter 
or  certificate  of  complete  organization  is  issued  by 
the  State  creating  such  corporation ;  in  other 
words,  as  soon  as  the  subscription  is  acted  upon 
by  such  State. 

As  between  the  subscribers  to  the  capital  stock, 
a  special  agreement  to  accept  property,  at  a  fair 
valuation,  in  payment  for  such  stock  is  also  legal, 
and  the  valuation  placed  thereon  by  the  sub- 
scribers or  promoters  will  govern;  such  agree- 
ment wdll  not  bind  the  corporation  unless  acted 
upon  and  adopted  by  it. 

Contracts  for  underwriting  and  guaranteeing 
the  stocks  or  bonds  of  a  corp)ration  before  it  is 
formed,  are  not  free  from  objection  on  account  of 
the  difficulty  in  the  preparation  of  such  contracts 
owing  to  the  lack  of  a  legal  entity  to  contract 
with;  it  is  usual  to  make  such  contracts  with  a 
trustee  or  party  acting  as  such  for  and  on  behalf 
of  the  organizers  of  such  proposed  corporation  or 
the  parties  who  are  to  become  interested  therein. 

To  summarize,  it  may  be  said  that  promotion 


170  PKOMOTION   OF  ENTEEPKISES. 

contracts  or  contracts  that  have  to  do  with  pro- 
motion of  an  enterprise  are  so  numerous  as  to 
involve  the  whole  law  of  contracts,  and  that  any 
extended  discussion  of  that  subject  is  beyond  the 
purpose  of  this  volume. 

The  reader  is  here  referred  to  the  various  con- 
tracts and  other  illustrations  given  in  the  appen- 
dix hereto,  all  of  which  have  been  successfully 
used  by  the  writer  in  the  course  of  his  professional 
connection  with  the  promotion  and  financing  of 
enterprises. 


Good  Will.  In  the  preceding  chapters  we  have 
and  ^T  rTd  e  chiefly  referred  to  tangible  property 
Names.  and  its  relation  to  the  subjects  of 

organization  and  reorganization  of  business  enter- 
prises. Under  this,  and  the  following  head  we  will 
discuss  intangible  assets,  a  species  of  property  of 
comparative  recent  origin,  and  which  is  largely 
the  product  of  the  business  ability,  devotion  to 
principle  and  ingenuity  of  those  creating  it. 

As  has  been  heretofore  stated,  the  good  will — 
general  reputation  for  reliability  and  ability  to 
serve — is  frequently  of  greater  value  than  the 
tangible  assets  belonging  to  an  enterprise,  and 
the  law  now  recognizes  it  as  a  very  respectable 
species  of  property.  At  the  same  time  it  is  not 
permissible  to  arbitrarily  value  the  good  will  of  a 


PROMOTION   OF  ENTERPRISES.  171 

business  so  as  to  create  a  fictitious  asset,  as  is  so 
frequently  done. 

The  subject  of  Trademarks  and  Trade  Names 
is  so  intimately  connected  with  that  of  Good  Will 
that  it  is  deemed  necessary,  for  a  practical  under- 
standing of  their  importance  and  use,  to  consider 
them  together.  In  fact  they  are  inseparable  when 
considered  in  the  light  and  for  the  purpose  here 
intended. 

Trademarks  are  arbitrary  symbols,  devices  or 
distinguishing  marks  applied  to  a  given  article 
of  manufacture  which  are  destined  to  appeal  to 
the  eye  and  serve  as  a  means  of  ready  and  certain 
identification  from  all  other  products  of  a  similar 
nature;  while  the  use  of  the  Trade  Name  is  to 
show  the  source  from  which  the  particular  article 
came.  Therefore  the  Trade  Name,  appealing  as 
it  does  to  the  ear,  is  so  intimately  connected  with 
the  Good  Will  of  the  Manufacturer  as  to  be  its 
means  of  identification. 

The  reputation  and  standing  of  a  business  is 
identified  and  protected  only  by  and  through  its 
name  and  arbitrary  marks  for  identification  of 
its  product,  and  the  possession  of  either  or  both 
may  enable  a  stranger  to  the  particular  enterprise 
to  begin  where  another  leaves  off,  and  thereby 
profit  by  his  past  efforts.  And  here  we  find  proof 
positive  of  the  established  ethical  doctrine,  viz.: 
that  honesty  and  fair  dealing  are  indispensable  to 


172  PROMOTION   OF  ENTERPRISES. 

permanent  success  in  business,  for  the  most  valu- 
able and  thoroughly  established  Good  Will  may 
perish  when  and  as  soon  as  the  public  discover 
any  deterioration  or  lack  of  the  quahties  which 
have  created  it  in  the  first  instance. 

The  creation  of  the  species  of  property  under 
consideration,  viz. :  good  will  and  trade  names,  as 
well  as  trademarks,  are  the  result  of  the  labor, 
skill  and  investments  of  the  possessor,  and  their 
protection  and  utilization  as  property  universally 
receive  adequate  protection. 

The  life  of  a  trademark  is  perpetual,  and  while 
the  law  protects  it  for  the  benefit  of  the  public, 
the  protection  of  the  trade  name  is  principally 
for  the  party  entitled  to  it. 

The  property  right  in  trademarks  is  recognized 
by  common  law,  and  has  been  by  the  courts  since 
the  latter  part  of  the  fifteenth  century.  Most  of 
the  States  have  laws  for  the  protection  of  trade- 
marks, and  the  National  Government  has  a  com- 
plete system  for  their  registration. 

It  is  essential  to  the  property  right  in  a  trade- 
mark that  the  party  claiming  it  as  his  own  should 
be  the  first  to  adopt  it  as  such,  and  then  to  so  use 
the  mark  as  to  show  the  intent  to  create  a  prop- 
erty right  therein ;  and  this  may  be  done  only  by 
actual  adoption  and  constant  use  by  the  originator 
or  his  successors  or  assigns. 

The    reason    that   the    law   of   trademarks   is 


PBOMOTION   OP  ENTERPRISES.  173 

designed  chiefly  for  the  protection  of  the  public 
is  to  prevent  the  substitution  of  an  inferior  for 
a  superior  article,  or  of  one  man's  goods  for 
another 's. 

For  what  may  be,  as  well  as  for  what  may  not 
be  an  appropriate  trademark,  is  beyond  the  scope 
of  this  book,  it  being  a  subject  of  too  great  moment 
and  importance  to  be  treated  in  a  general  discus- 
sion of  the  subject  as  this  is  designed  to  be.  Like 
the  general  law,  it  must  necessarily  receive  the 
attention  of  one  versed  in  the  particular  branch  of 
the  science,  whenever  the  questions  relating  to  the 
adoption  and  establishment,  as  well  as  the  regis- 
tration, of  a  trademark  is  involved. 

Generally  speaking,  however,  geographical 
names  cannot  be  appropriated  as  such  trade- 
marks, and  unless  protected  through  the  laws  of 
unfair  competition,  there  is  no  protection  in  the 
use  of  such  geographical  names.  Neither  can  the 
name  of  a  given  commodity  be  used  as  a  trade- 
mark, and  this  applies  as  well  to  the  name  of  an 
article  that  is  patented;  for  after  the  life  of  a 
patent  has  expired  by  limitation,  the  public  has 
a  right  to  use  the  name  by  which  such  patented 
article  has  been  identified,  as  well  as  to  its  unre- 
stricted manufacture.  The  name  of  the  producer 
or  words  necessarily  descriptive  of  the  article 
cannot  be  used  as  trademarks. 

To  constitute  a  valid  trademark  and  what  may 


174  PKOMOTION   OF  ENTERPRISES. 

be  adopted  for  such  a  purpose,  the  name  or  symbol 
must  be  exclusive — that  is,  it  must  be  first  adopted 
and  used  by  the  party  claiming  it  for  marking  a 
certain  article,  grade  or  quality  of  his  product; 
and  he  may  not  infringe  on  the  marks  of  others 
so  as  to  create  confusion  and  deception.  Gen- 
erally speaking,  any  original  symbol,  word  or 
mark  which  others  have  not  an  equal  right  to  use 
may  be  adopted  as  a  trademark. 

Eegistration  of  trademarks  is  not  a  means  of 
creating  them,  but  it  serves  to  establish  title,  by 
proof  of  adoption. 

The  value  of  trademarks  to  a  business  is  now 
almost  universally  understood  and  acknowledged ; 
their  use  tends  to  fix  in  the  minds  of  all  who 
observe  them  the  object  advertised,  regardless  of 
the  wording  of  the  advertisement  or  whether  it  is 
ever  read  or  not;  hence  the  advertisement  is  not 
a  loss  in  any  event. 

The  Good  Will  and  Trade  Name  are  a  species 
of  property  that  may  be  valued  and  sold,  and  the 
purchaser  protected  in  their  enjoyment  the  same 
as  any  other  property;  the  same  is  true  with 
trademarks. 

The  assignment  of  trademarks  may  be  made  to 
the  same  extent  as  other  property,  but  with  one 
important  exception — the  trademark  must  (with 
few  exceptions)  accompany  and  pass  to  the  party 
who  purchases  the  good  will  of  the  business ;  any 


PROMOTION   OF  ENTERPRISES.  175 

general  assignment  of  the  good  will,  will  carry 
with  it  the  trademarks  in  use,  without  any  special 
reference  to  such  trademarks  in  the  assignment, 
and  this  is  equally  true  of  the  trade  name  in  use. 

While  it  is,  of  course,  impossible  to  fix  the  value 
of  the  good  will  of  a  business  with  mathematical 
precision  and  accuracy,  still  such  value  may  be 
arrived  at  with  sufficient  certainty  for  all  prac- 
tical purposes.  The  common  rule  adopted  for 
valuing  the  good  will  is,  to  first  ascertain  the  net 
earning  capacity  of  the  business  for  a  given 
period  (after  deducting  the  current  rate  of  interest 
on  the  capital  employed),  usually  for  a  sufficient 
number  of  years  to  reach  the  general  average  of 
such  earning  capacity,  then  to  divide  the  amount 
thus  obtained  by  the  number  of  years  over  which 
the  estimate  extends,  and  this  will  constitute  the 
general  average  profits  upon  which  the  value  of 
the  good  will  depends.  Then  as  to  the  value,  it 
must  necessarily  vary  according  to  the  circum- 
stances of  the  particular  case.  The  value  of  the 
good  will  of  a  manufacturing  industry  cannot  be 
ascertained  in  the  same  manner  as  that  of  a  whole- 
sale merchandising  enterprise,  and  the  principles 
that  would  apply  in  either  case  would  not  usually 
govern  where  a  general  or  special  retail  business 
was  involved. 

A  common  practice  in  determining  and  fixing 
the  value  of  the  good  will  of  a  manufacturing 


176  PEOMOTIOX   OF   ENTERPRISES. 

industry  (where  common  stock  is  to  be  issued 
therefor)  has  heretofore  been  to  place  the  amount 
at  a  sum  upon  which  the  annual  net  earnings 
(after  deducting  the  current  rate  of  interest 
on  the  average  investment  involved)  would  pay 
a  dividend,  equal,  at  least,  to  the  legal  rate  of 
interest  prevailing  in  the  State  where  the  trans- 
action occurs.  As  an  example,  suppose  the  aver- 
age annual  net  earnings  to  be  fifty  thousand 
dollars  ($50,000) ;  this  would  be  five  per  cent 
(5%)  on  one  million  dollars  ($1,000,000)  and  that 
sum  would  constitute  the  value  of  the  good  will. 
But  this  is  purely  arbitrary  and  without  founda- 
tion in  reason,  as  the  good  will  differs  so  widely 
in  character  from  actual  money  or  money's  worth 
that  to  make  it  a  basis  of  value  upon  its  earning 
power  is  to  go  further  and  place  its  intrinsic 
worth  equal  to  money  as  well.  Besides,  the  good 
will  of  a  business  has  no  value  aside  from  its 
immediate  connection  with  the  business  itself,  and 
upon  the  winding  up  of  the  enterprise,  by  law  or 
upon  liquidation,  the  property  vanishes. 

As  before  intimated,  no  inflexible  rule  will  apply 
in  fixing  the  value  of  the  good  will  of  a  business ; 
its  age,  character,  position  in  the  peculiar  field 
occupied,  its  standing  and  earning  capacity  are  all 
elements  of  its  value  only ;  and  in  order  to  do  jus- 
tice to  the  present  as  well  as  the  future  prospects 
of  an  enterprise  that  undertakes  to  determine  and 


PROMOTION   OF  ENTERPRISES  177 

set  up  a  fixed  asset  of  this  character,  the  utmost 
skill  and  good  faith  must  be  exercised  in  placing 
a  valuation  thereon. 

As  to  the  trademarks,  they  are  integral  parts 
of  the  business  as  a  unit,  and  their  individual 
value  is  not  important,  except  as  important  ele- 
ments in  the  valuation  of  the  good  will  and  their 
relative  value  and  importance  to  the  future  of 
the  enterprise. 

Here,  as  with  patents,  it  is  difficult  to  value 
** future  prospects  and  possibilities''  and  this 
must  depend  upon  the  particular  circumstances 
of  the  case  under  consideration;  for  if  the  busi- 
ness has  been  organized  and  established  with  skill 
and  experience  behind  it,  its  future  prospects  and 
possibilities  may  be  of  far  greater  value  than  its 
present  good  will,  and  in  this,  at  least,  intangible 
property  differs  from  that  of  tangible,  viz.:  in 
that  of  their  valuation. 


Patents  and  It  is  to  iuveutive  gcuius  that  wc 
ciai  Va^^r  "  owe  much  of  the  wonderful  material 
progress  of  the  world  during  the  last  few  hundred 
years.  Starting  from  the  printing  press,  which 
has  brought  universal  education  and  enlighten- 
ment, making  civil  and  religious  liberty  possible, 
a  succession  of  astonishing  inventions  has  carried 


178  PROMOTION   OF  ENTERPRISES. 

civilization  forward  by  leaps  and  bounds  to  this, 
the  ** Machine  Age."  The  weaving  inventions 
have  clothed  the  humblest  laborer  in  fabrics  that 
once  delighted  kings.  Steam  and  electricity  have 
made  all  nations  neighbors,  and  the  minor  special 
inventions  and  discoveries  have  filled  the  houses 
of  the  *^ common  people"  with  luxuries  which  but 
a  few  generations  ago  were  beyond  the  dreams  of 
princes. 

Eecognizing  the  value  to  society  of  the  wonder- 
ful fruits  of  invention  and  investigation,  govern- 
ments have  sought  to  stimulate  the  efforts  of 
inventors  by  the  enactment  of  laws  that  enable 
them  to  reap  a  suitable  reward  for  their  services 
to  humanity. 

Although  many  an  inventor  has  slept  on  his 
rights,  and  never  realized  enough  to  cover  the 
expense  of  suing  out  a  patent  on  his  invention, 
yet  many  of  the  great  fortunes  amassed  in  this 
country  have  had  patents  for  their  basis.  We 
readily  recall  the  Pullman  palace  car;  the  tele- 
phone and  numberless  other  electric  inventions; 
the  Westinghouse  air  brake;  the  mowing  and 
reaping  machines;  the  bicycle  and  automobile 
devices,  and  a  thousand  more.  Many  a  great 
manufacturing  business  has  been  built  up  on  some 
simple  invention  or  improvement  which  cheapened 
the  productions  of  some  article  of  common  use. 
In  fact,  the  most  fruitful  field  for  the  rank  and 


PROMOTION   OF  ENTERPRISES.  179 

file  of  the  army  of  inventors  has  been  among  the 
simpler,  almost  trifling,  inventions,  and  improve- 
ments on  other  inventions. 

The  inventors  of  a  shoe-button,  a  safety-pin,  a 
hook-and-eye,  the  *  *  roaming  toy,  * '  a  dime  savings 
bank,  etc.,  made  quick  and  easy  fortunes. 

Notwithstanding  the  great  number  of  patents 
issued,  it  seems  as  if  the  field  for  new  ones  grows 
wider  the  more  the  patents  increase.  Each  new 
development  seems  to  create  new  wants  and 
the  need  of  new  devices.  Inventions  known  as 
** novelties,''  and  improvements  on  articles  in 
every  day  use  are  constantly  in  demand. 

Contrary  to  the  prevailing  notion  among  many 
laymen,  the  fact  that  an  article  has  been 
** patented"  is  no  conclusive  assurance  that  an 
exclusive  right  **to  manufacture  and  use"  such 
an  article  is  thereby  secured  to  the  owner.  While 
it  is  true  that  the  issuing  of  letters  patent  on  an 
invention  is  prima  facie  evidence  of  its  patenta- 
bility, still  it  is  not  conclusive  evidence. 

In  investigating  the  questions  in  hand,  the  statu- 
tory requisites  to  patentability  first  require  con- 
sideration. In  order  that  they  may  be  under- 
stood, the  law  on  the  subject  will  be  here  given, 
namely : 

**Any  person  who  has  invented  or  discovered 
any  new  and  useful  art,  machine,  manufacture,  or 
composition  of  matter,  or  any  new  and  useful 


180  PROMOTION   OP  ENTERPRISES. 

improvements  thereof,  not  known  or  used  by 
others  in  this  country  before  his  invention  or  dis- 
covery thereof,  and  not  patented  or  described  in 
any  printed  publication  in  this  or  any  foreign 
country  before  his  invention  or  discovery  thereof, 
for  more  than  two  years  prior  to  his  application, 
and  not  in  public  use  or  on  sale  in  this  country 
for  more  than  two  years  prior  to  his  application, 
unless  the  same  is  proved  to  have  been  abandoned 
may,  upon  payment  of  the  fees  required  by  law, 
and  other  due  proceedings  had,  obtain  a  patent 
therefor. ' ' 

It  is  apparent  that  utility  is  one  of  the  chief 
considerations  upon  which  the  Government  grants 
its  exclusive  right  to  use  and  produce  an  inven- 
tion ;  and  this  important  requisite  to  patentability 
largely  determines  its  commercial  worth  as  well. 
As  already  appears,  the  invention  must  be  **new 
and  useful,''  as  well  as  useful j  but  manifestly  the 
fact  that  the  invention  is  new  would  not  render  it 
of  any  value  in  the  business  world  unless  it  was 
useful  as  well;  therefore,  in  arriving  at  the  com- 
mercial value  of  a  patented  invention  utility  is 
the  first  feature  to  consider. 

The  essential  features  that  determine  the  com- 
mercial value  of  a  patented  invention,  and  the 
order  in  which  they  may  be  investigated,  are: 
First,  the  utility,  i.  e.,  the  usefulness — ^intrinsic 
novelty  and  the  probable  demand;  second,  the 


PROMOTION   OF  ENTERPRISES.  181 

cost  of  production,  i.  e.,  the  manufacturing  possi- 
bilities and  means  of  producing  the  invention; 
third,  the  legal  novelty — patentability,  L  e.,  the 
construction  and  validity  of  the  specifications  and 
claims,  as  well  as  the  protection  afforded  thereby ; 
and,  fourth,  the  title  of  the  patentee  or  alleged 
owner  of  the  invention. 

As  to  the  utility  and  manufacturing  merits  and 
cost  of  an  article,  these  are  questions  for  the 
experienced  business  man  and  skilled  mechanic, 
and  they  are,  as  before  stated,  of  first  importance 
in  determining  the  commercial  value  of  an  inven- 
tion. 

Perhaps  the  simplest  method  of  determining 
the  legal  novelty,  i.  e.,  patentability  of  an  inven- 
tion, and  the  one  primarily  useful,  is  to  see  if  it 
contains  either  or  both  of  the  following  elements : 
First,  if  the  article  produced  is  as  good  in  quality, 
and  (as  a  result  of  the  invention)  such  article  can 
be  produced  at  a  cheaper  rate  than  similar  articles 
already  on  the  market ;  or,  if  it  is  better  in  quality 
and  can  be  produced  at  the  same  rate  as  other 
articles,  or  both  combined ;  and  Second,  as  to  the 
device  or  method  of  production,  if  the  object  in 
view  or  manner  of  obtaining  the  same  be  new,  and 
the  device  or  product  be  useful,  then  it  may  be 
considered  a  patentable  invention  and  subject  to 
such  protection. 

The  law  protects  simplicity  and  economy  of  con- 


182  PKOMOTION   OF  ENTERPKISES. 

struction,  and  the  fact  that  the  invention  does 
not  appear  to  be  a  great  one  will  not  prevent  its 
being  considered  as  a  new  and  useful  invention. 
The  substitution  of  different  kinds  of  power  for 
the  accomplishment  of  a  common  end  is  not  a 
subject  of  patent;  the  mere  assembling  of  a 
number  of  old  devices  or  forms  for  the  accom- 
plishment of  a  well-known  result  is  not  patentable ; 
the  omission  of  an  element  from  a  device  so  that 
the  same  result  may  be  obtained  by  a  less  number 
of  operations  or  devices  is  patentable;  the  com- 
bination of  known  elements  for  the  production  of 
a  new  result  is  patentable;  the  accomplishing  of 
a  greater  result  or  utility  from  the  same  quality 
of  material  may  be  patentable,  etc. 

The  fact  that  a  resourceful  patent  attorney  may 
have  obtained  letters  patent  on  a  device  that  did 
not  in  reality  contain  patentable  requisites  may 
be  disclosed  for  the  first  time  upon  the  trial  of  a 
suit  for  infringement.  An  illustration  of  this  fact 
is  found  in  a  recent  case  decided  by  the  Supreme 
Court  of  the  United  States,  involving  the  validity 
of  patents  issued  upon  *^ sectional  bookcases," 
where  two  rival  manufacturers  sought  to  establish 
their  respective  rights  to  the  exclusive  use  of  these 
now  popular  office  and  household  articles,  with 
the  result  that  the  Supreme  Court  held  the  patents 
to  be  void  for  lacJc  of  patentahility. 

Another    practical    subject    for    consideration 


PROMOTION   OF  ENTERPRISES.  "        183 

relates  to  questions  of  conveyance.  The  titles  to 
patented  inventions  may  be  investigated  in  a 
similar  manner  to  those  of  real  estate,  for  the 
reason  that  the  Government  has  a  complete  record- 
ing system,  wherein  all  conveyances,  licenses,  etc., 
are  {or  should  be)  recorded;  and  an  abstract  of 
title  may  be  had,  by  application  to  the  Commis- 
sioner of  Patents,  and  the  payment  of  the  neces- 
sary charges  therefor,  which  depends  entirely 
upon  the  number  of  transfers  that  have  been 
recorded,  and  such  an  abstract  of  title  is  neces- 
sary to  determine  and  show  the  title  to  any 
patented  invention. 

The  subject  of  transfer  of  letters  patent  may 
be  divided  into  three  classes.  First,  the  assign- 
ment of  the  whole  or  an  undivided  interest  in  an 
invention  before  letters  patent  have  been  issued ;  * 
second,  an  assignment  of  the  whole,  or  an  undi- 
vided interest,  in  an  invention  after  letters  patent 
have  been  issued,!  and  third,  a  license  or  other 
conveyance,  not  amounting  to  an  absolute  sale  of 
the  whole  or  any  part  of  the  invention  itself. 

An  invention  is  susceptible  of  being  conveyed 
prior  to  the  issuing  of  letters  patent  thereon ;  and 
as  between  the  parties  to  such  a  contract  the  same 
is  binding,  whether  the  patent  ever  issued  or  not ; 


*  See  form  in  Appendix,  page  264. 
t  See  form  in  Appendix,  page  266. 


184  PROMOTION   OF  ENTERPRISES. 

and  should  the  patent  issue,  such  contract  has  the 
same  force  and  effect  as  an  assignment  after  issue. 
In  fact,  it  is  not  unusual  for  such  assignment  to 
contain  authority  and  instruction  to  the  Commis- 
sioner of  Patents  to  issue  the  patent  to  the 
assignee. 

As  to  the  conveyance  of  a  patented  invention 
after  letters  patent  have  issued,  this  is  compara- 
tively a  simple  matter,  requiring  only  that  the 
person  who  is  the  owner  of  such  patented  inven- 
tions shall  execute  a  formal  conveyance  of  the 
same.  The  only  important  observation  that  need 
be  made  on  the  subject  of  actual  conveyance  is  as 
to  the  propriety  of  an  inventor  or  owner  of  letters 
patent  conveying  an  undivided  interest  (i.  e.,  a 
one-half  or  one-third  interest)  in  the  same;  for 
such  an  act  may  destroy  the  value  of  the  monopoly 
in  the  invention.  It  has  been  demonstrated  and 
decided  that  the  owner  of  an  undivided  interest 
in  an  invention  has  all  the  rights  of  the  exclusive 
owner  so  far  as  to  manufacture,  vend  and  sell  the 
device  in  question;  and  besides,  it  is  essential 
that  in  prosecuting  or  defending  an  infringement 
suit  the  owners  of  the  entire  interest  must  join  in 
order  to  maintain  or  defend  such  a  suit ;  and  this 
may  be  impossible  after  the  conveyance  of  a  part 
has  been  made. 

In  relation  to  contracts  which  purport  to  be 
licenses  or  '*shop  rights"  for  the  exclusive  or 


PROMOTION  OF  ENTERPRISES.  185 

territorial  right  to  manufacture  or  sell  a  patented 
invention,  the  wording  of  such  contracts  may 
amount  to  a  transfer  of  the  entire  interest  of  the 
inventor,  instead  of  a  license  or  contract,  unless 
care  is  exercised  in  the  preparation  of  such  an 
instrument.  In  general,  any  wording  that  amounts 
to  the  sole  and  exclusive  right  and  monopoly  of 
manufacturing  or  selling  the  device  is  a  transfer 
of  the  entire  interest  therein. 

A  simple  test  of  the  question  as  to  whether  a 
license  in  reality  amounts  to  a  conveyance  is  if 
the  grant  vests  the  entire  interest  in  the  invention 
or  transfers  the  monopoly  therein,  it  is  an  as- 
signment; on  the  other  hand,  if  it  leaves  in  the 
assignor  any  part  of  the  exclusive  monopoly 
granted  under  the  patent,  then  the  conveyance  is 
a  license.  It  is  always  a  question  of  construction 
of  the  language  used,  and  it  is  necessary  that 
great  care  should  be  exercised  in  the  wording  of 
the  instrument  intended  as  a  license. 

The  soliciting  of  patents  is  essentially  a  spe- 
cialty  in  the  practice  of  Patent  Law,  and  the  com- 
mercial value  of  a  patent  depends  in  a  marked  de- 
gree upon  the  care,  skill  and  ability  of  its  solicitor. 

Much  criticism  has  been  made  upon  our  patent 
laws  on  account  of  the  opportunity  which  is  ac- 
corded thereby  to  deprive  the  public  of  the  bene- 
fit of  new  and  useful  inventions  during  the  life- 
time of  the  patent.    An  investigation  of  the  pat- 


186  PROMOTION   OF  ENTERPRISES. 

ent  records  at  Washington  discloses  tlie  fact  that 
many  important  improvements  on  existing  devices 
now  in  common  use  have  been  made,  and  that  they 
have  been  purchased  by  leading  manufacturers 
in  the  line  of  business  to  which  the  invention  per- 
tains ;  that  instead  of  * '  bringing  out ' '  such  inven- 
tions, and  giving  the  public  the  benefit  of  their  im- 
provements, they  are  *^ shelved^'  so  to  speak. 

The  explanation  for  this  evidently  lies  in  the 
fact  that  one  of  the  most  expensive  departments 
of  every  manufacturer  is  the  **  experimental  de- 
partment'' and  the  great  expense  attached  to 
the  making  of  constant  changes  in  a  given  prod- 
uct, besides  the  confusion  which  would  be  pro- 
duced thereby.  At  the  same  time  these  *  *  business 
reasons''  do  not  satisfy  or  interest  the  public, 
who  have  granted  the  patent  protection  to  the 
inventor  as  a  reward  bestowed  for  his  invention 
and  a  stimulus  to  future  efforts. 

One  of  the  manifold  benefits  to  be  derived  by 
adopting  the  corporate  system  inures  to  the  in- 
ventor when,  as  is  frequently  the  case,  he  is 
without  sufficient  means  to  develop  and  market  his 
invention.  As  has  been  hereinbefore  intimated, 
he  may  not  assign  an  undivided  interest  in  his  in- 
vention without  risking  the  monopoly  or  exclu- 
sive right  to  manufacture,  vend  and  sell  the  same, 
and  this  may  occur  as  well  by  a  co-partnership 
arrangement  for  its  control  as  by  separate  as- 


PROMOTION   OP  ENTERPRISES.  187 

signment;  hence  the  almost  universal  adoption  of 
the  corporate  plan  under  all  such  and  similar  cir- 
cumstances. 

An  inventor  may  form  a  corporation  under  the 
laws  of  any  State,  and  assign  his  invention  to 
such  corporation  without  endangering  the  rights 
secured  to  him  under  the  letters  patent  from  the 
Federal  Government.  As  in  every  other  case,  it 
behooves  him  to  protect  his  rights  in  the  cor- 
poration by  retaining  control  or  a  sufficient  inter- 
est in  the  same  to  insure  protection.  The  cor- 
poration becomes  the  sole  owner  of  the  invention 
by  such  an  assignment  as  above  suggested,  and 
through  its  elasticity  for  adaptation  to  particular 
needs,  any  legal  purpose  may  be  accomplished, 
either  through  the  making  of  a  contract  with  the 
inventor  or  the  issuance  of  its  capital  stock  for 
the  reasonable  fair  commercial  value  of  the  in- 
vention. And  while  the  courts  have  held  that 
there  is  no  presumption  of  value  to  a  patented  in- 
vention, yet  it  may  be  safely  said  that  such  a 
value  may  be  placed  upon  the  invention  as  its 
particular  merits  and  the  extent  of  the  protec- 
tion afforded  by  the  patent  grant  will  warrant, 
and  this  may  be  determined  by  the  rules  referred 
to  herein,  and  others  which  will  present  them- 
selves in  every  case,  and  the  reasonable  value  of 
such  invention  to  the  corporation,  if  fairly  arrived 
at,  will  govern. 


188  PROMOTION   OF  ENTERPRISES. 

It  has  been  the  almost  universal  experience  of 
those  attempting  to  deal  with  inventors  (as  a 
class)  that  they  greatly  exaggerate  the  real  com- 
mercial value  of  their  inventions;  and  this  un- 
doubtedly is  due  to  the  application  and  devotion 
which  has  been  bestowed  to  create  the  invention 
in  the  first  instance,  or  the  lack  of  experience  in 
marketing  or  the  development  of  new  improve- 
ments in  existing  devices. 


Mining    E  n-      rj}^Q  y^g^  amount  of  Capital  neces- 

terprises.  .  ,        ,   . 

sarily  involved  m  acquiring,  equip- 
ping, developing  and  conducting  mining  enter- 
prises makes  this  one  of  the  most  favorable  ob- 
jects for  corporate  organization;  and  while  many 
of  the  principles  heretofore  announced  as  relat- 
ing to  this  form  of  existence  generally  apply  with 
equal  force  to  mining  enterprises,  still  there  are 
important  questions  which  should  be  considered 
separately,  as  peculiarly  applicable  to  such  un- 
dertakings. 

That  there  is  such  a  legal  and  practical  dis- 
tinction between  mining  corporations  and  those 
organized  for  commercial  and  other  undertakings 
has  been  recognized  by  courts  of  review.  In  con- 
sidering the  nature  of  mining  as  distinguished 
from  commercial  corporations,   or  corporations 


PROMOTION   OF  ENTERPRISES.  189 

created  for  the  conduct  of  commercial  enterprises 
generally,  one  court  said : 

** Mining  corporations  are  sui  generis.  They 
are  organized  and  carried  on  upon  principles 
wholly  different  from  banking,  railroad,  insur- 
ance and  ordinary  commercial  corporations  hav- 
ing a  subscribed  capital  stock/' 

And  to  some  degree,  at  least,  the  rules  relating 
to  organizing  the  different  kinds  of  mining  cor- 
porations differ,  particularly  in  the  mode  of 
financing.  The  plans  that  would  be  applicable  to 
a  corporation  formed  for  the  mining  of  precious 
metals  would  not  ordinarily  be  appropriate  for  a 
corporation  created  for  the  operation  of  coal 
properties,  the  development  of  a  marble  or  stone 
industry,  or  the  operation  of  oil  or  natural  gas 
properties. 

The  reason  for  this  lies  largely  in  the  character 
of  the  undertaking.  In  the  case  first  named  its 
speculative  character  is  to  be  taken  into  consid- 
eration, and  the  plans  of  financing  applicable  to 
mining  enterprises  of  a  speculative  character  dif- 
fer widely  from  those  commonly  adopted  for  the 
promotion  of  those  which  are  less  so. 

Specialization  in  the  professions  and  business 
alike  is  now  universal,  and  this  fact  is  emphasized 
in  the  subject  under  consideration.  An  operator 
in  the  copper,  lead  or  zinc  field  would  not,  as  a 
rule,  be  equipped  to  operate  a  coal  mine,  and  vice 


190  PBOMOTION   OF  ENTEKPRISES. 

versa.  And  a  miner  of  the  precious  metals  could 
not  adopt  the  same  methods  used  by  him,  and 
which  are  acquired  by  experience  and  training  in 
that  special  department  of  mining,  to  either  of 
the  other  classes  named. 

The  geologist  and  mining  engineer  also  special- 
ize, as  do  the  manufacturers  and  dealers  in  min- 
ing equipment  and  supplies;  and  the  advantages 
of  specializing  in  this  field,  as  in  all  others,  are 
now  well  recognized  by  all  familiar  with  the 
subject.  The  owner  of  a  valuable  mining  prop- 
erty which  had  met  with  disaster  would  now  no 
more  employ  a  mining  engineer  who  was  not  a 
specialist  in  that  particular  class  of  mining  than 
the  same  individual  would  call  a  general  medical 
practitioner  to  perform  a  major  surgical  opera- 
tion upon  himself. 

In  the  discussion  of  the  subject  in  hand  no  at- 
tempt will  be  made  to  detail  the  history  of  that 
class  of  mining  corporations  which  have  been 
organized  for  questionable  or  fraudulent  pur- 
poses— such  as  the  acquiring  of  capital  to  pay 
salaries,  and  to  provide  a  means  for  their  pro- 
moters to  get  hold  of  stock  certificates  in  order 
that  they  might  get  money  from  the  inexperienced 
investors,  the  chief  concern  of  those  organizing 
such  companies  being  to  successfully  avoid  crim- 
inal prosecution  for  their  transactions.  At  the 
same   time   no   extended   discussion  will   be   at- 


PKOMOTION   OF  ENTERPKISES.  191 

tempted  of  the  innumerable  plans  and  devices 
which  have  been  heretofore  adopted  to  finance  and 
promote  speculative  mining  enterprises,  particu- 
larly those  devoted  exclusively  to  the  mining  of 
precious  metals.  It  will  be  sufficient  for  the  pur- 
poses of  this  volume  to  state  that  the  manner  of  or- 
ganization of  such  a  corporation  must  be  governed 
by  the  circumstances,  and  the  laws  of  the  State 
where  the  particular  corporation  is  created,  and  to 
refer  to  some  of  the  practical  and  distinguishing 
features  generally. 

The  important  questions  of  procedure  which 
arise  for  consideration  in  the  organization  of  and 
which  are  peculiar  in  a  mining  corporation  are 
first,  the  capitalization,  and  this  involves  the  neces- 
sities of  the  incorporators  as  well  as  questions  of 
finance;  the  next  is  undoubtedly  the  purpose  of 
the  corporation  which  is  to  conduct  such  an  enter- 
prise; and  the  third  is  the  domicile,  or  the  selec- 
tion of  a  State  for  its  creation. 

It  is  customary  (and  undoubtedly  the  custom 
will  continue)  to  capitalize  corporations  that  are 
organized  to  mine  precious  metals  or  to  develop 
oil  fields  at  an  arbitrary  amount,  without  regard  to 
the  value  of  the  property  which  it  is  to  own  and 
operate;  then  to  convey  the  mining  and  other 
claims  to  the  corporation  for  all,  or  a  large  pro- 
portion of  the  capital  stock,  and  to  then  donate 
back  into  the  treasury  all,  or  so  much  of  the 


192  PROMOTION   OF  ENTEEPRISES. 

capital  stock  as  is  to  be  sold  for  development 
purposes;  and  this  might  be  considered  the  es- 
tablished custom,  and  one  which  is  free  from  legal 
objections.  Particularly  is  this  true  when  such 
mining  corporations  are  created  under  the  laws  of 
a  State  where  the  mining  of  precious  metals  is 
the  principal  industry,  for  in  all  such  States  spe- 
cial laws  have  been  enacted  to  encourage  the  de- 
velopment of  the  Staters  mining  resources,  and 
the  speculative  nature  of  the  undertaking  is  there 
recognized  and  the  value  placed  upon  the  mining 
claims  or  other  properties  by  directors  of  domes- 
tic corporations  are  conclusive. 

In  regard  to  the  less  speculative  mining  enter- 
prises, such  as  those  enjoyed  in  mining  coal,  cop- 
per, lead,  zinc  and  stone,  their  capitalization 
should  receive  more  conservative  treatment,  and 
they  may  be  considered  as  more  nearly  approach- 
ing the  commercial  corporation  in  regard  to  their 
formation.  An  example  of  ^^high  finance''  in  the 
consolidation  of  coal  properties  has  been  already 
shown,  and  the  general  principles  therein  exempli- 
fied w411  illustrate  the  possibilities  of  creating 
questionable  securities  by  grossly-inflated  valua- 
tion of  the  properties  consolidated.  It  may  be  con- 
ceded that  the  latitude  permissible  in  the  valuation 
of  properties  of  this  character  is  greater  than  in 
the  ordinary  industrial  undertaking,  and  that  the 
*  *  good-faith ' '  rule,  hereinbefore  referred  to,  is  all 


PROMOTION   OF  ENTEBPRISES.  193 

that  is  required ;  that  is,  the  exercise  of  good  faith 
and  the  absence  of  fraud  in  the  valuation  of  such 
mining  properties  will  constitute  a  safe  rule,  both 
as  to  liability  of  directors  or  upon  the  capital  stock 
issued  in  payment  for  such  properties. 

It  is  of  practical  importance  that  the  capitaliza- 
tion of  a  mining  corporation  should  be  fixed  with 
due  regard  for  its  ultimate  object.  If  no  further 
properties  are  to  be  acquired  than  the  one  in 
contemplation  at  the  time  of  organization,  the 
amount  of  capitalization  should  be  governed  by 
the  value  of  the  mineral  rights  or  land,  and  the 
necessary  working  capital;  and  with  a  proper 
foundation  the  capital  stock  of  such  a  corpora- 
tion can  be  increased  to  meet  any  future  expan- 
sion that  may  be  deemed  advantageous.  But 
where  a  corporation  is  to  be  formed  to  acquire 
two  or  more  developed  mines,  or  with  that  ulti- 
mate object  in  view,  the  question  is  more  difficult 
of  solution,  and  no  general  rule  can  be  announced 
that  would  meet  the  requirements  of  any  but  par- 
ticular cases,  or  be  of  practical  value  in  so  doing; 
and  it  might  be  added  that  this  is  one  of  the  nu- 
merous conditions  which  confronts  the  organizers 
of  large  corporations  generally,  and  nothing  but 
an  intimate  knowledge  of  the  subject,  and  actual 
experience  in  its  application,  can  qualify  such 
organizers  to  properly  meet  and  dispose  of  many 
of  the  important  practical  questions  which  invari- 
ably arise. 


194  PROMOTION   OF  ENTERPRISES. 

The  creation  of  bonds  which  are  secured  by  the 
property  of  the  mining  corporation  (and  with  a 
proper  sinking  fund  clause  inserted)  is  frequently 
desirable,  for  the  purpose  of  raising  working  capi- 
tal as  well  as  for  the  protection  of  those  inter- 
ested in  the  enterprise ;  and  the  use  of  such  bonds 
has  frequently  been  the  means  by  which  a  worthy 
and  enterprising  operator  has  ultimately  acquired 
the  ownership  of  valuable  mining  property. 

The  sale  of  such  bonds  among  financial  insti- 
tutions is  often  difficult,  for  the  reason  that  the 
property  upon  which  they  are  secured  usually 
lies  at  a  distance,  and  the  value  of  such  property 
is  based  largely  upon  its  continued  operation  and 
development;  and  unless  this  is  assured,  such 
bonds  are  not  considered  as  desirable  security, 
and  experience  has  often  demonstrated  that  when 
such  bonds  are  sold  in  the  open  market  at  all,  it 
has  been  at  a  great  sacrifice.  However,  with 
proper  management  and  with  the  property  in  a 
developed  stage,  the  issuance  of  such  bonds  is 
not  only  advantageous  but  their  sale  to  private 
investors  or  local  financiers  may  be  effected  much 
more  readily  than  stock,  and  without  unreason- 
able sacrifice. 

The  purposes  or  objects  of  mining  corporations 
are  of  importance  for  all  the  reasons  heretofore 
given  under  another  and  appropriate  heading,  as 
well  as  for  the  following,  which  are  in  a  measure 


PEOMOTION   OF  ENTERPKISBS.  195 

peculiar  to  mining  corporations :  As  before  stated, 
it  is  a  well-settled  principle  of  law  in  every  juris- 
diction that  a  corporation  cannot  exceed  the  pow- 
ers conferred  upon  it  by  its  charter,  and  such 
powers  are  derived  by  and  through  the  wording 
of  the  purposes  or  objects  set  forth  in  the  appli- 
cation for  such  charter. 

Where  it  is  the  intention  of  the  incorporators 
to  do  more  than  actually  operate  a  mine,  such  as 
to  conduct  a  general  store,  to  erect  and  maintain 
dwelling-houses  for  employes,  to  construct  and 
operate  electric  or  other  power  plants,  tramways, 
etc.,  in  connection  with  the  mining  enterprise,  it 
is,  of  course,  necessary  that  these  powers  should 
be  conferred  upon  the  corporation  through  its 
charter. 

In  many  States  there  are  limitations  placed 
upon  corporations  owning  real  estate,  and  in  such 
States  care  must  be  exercised  not  to  violate  such 
laws;  for  it  has  been  held  that  even  though  the 
charter  is  granted  for  purposes  that  are  pro- 
hibited by  the  general  act  under  which  such  cor- 
portations  are  created,  the  unlawful  acts  may  be 
shown  to  defeat  the  corporation  whenever  it  at- 
tempts to  enforce  such  illegal  objects.  In  legal 
phraseology,  corporations  may,  under  such  cir- 
cumstances, be  ** attacked  collaterally.** 

The  following  may  be  considered  as  an  approved 
form  for  the  wording  of  the  special  objects  or  pur- 


196  PKOMOTION   OF  ENTEEPKISES. 

poses  of  a  mining  corporation  organized  under  the 
laws  of  the  State  of  Illinois  for  the  purpose  of 
mining  coal  : 

**To  mine,  buy,  sell  and  deal  in  coal  and  its  by- 
products; to  acquire  by  purchase,  lease  or  other 
lawful  means,  coal  lands  and  properties  necessary 
and  convenient  for  the  construction,  successful 
operation  and  maintenance  of  coal  mines  and  their 
equipment;  and  to  do  and  perform  any  and  all 
lawful  things  incidental  and  necessary  to  the  suc- 
cessful operation  of  coal  mines,  and  the  produc- 
tion and  sale  of  coal/' 

It  might  be  appropriate  to  add  that  the  implied 
powers  incident  to  corporate  existence  need  not 
usually  be  stated  in  the  charter.  In  many  States 
the  charter  enumerates,  in  detail,  such  implied 
powers,  while  such  powers  are  left  to  implication 
in  other  States,  and  in  the  last  named  States  the 
wording  of  the  purposes  or  objects  may  be  limited 
simply  to  the  principal  objects  contemplated; 
therefore  such  detailed  description  of  incidental 
powers  is  only  necessary  in  States  requiring  the 
same. 

In  relation  to  the  domicile  or  State  selected  for 
the  creation  of  a  mining  corporation,  the  observa- 
tions hereinbefore  made  on  the  subject  are  ap- 
plicable alike  to  such  corporations ;  and  except  for 
the  advantages  to  be  derived  by  a  trial  in  the 
Federal  courts  of  possible  litigation  for  personal 


PROMOTION   OF  ENTERPRISES.  197 

injuries  (as  well  as  other  cases)  such  corporations 
should  be  created  under  the  laws  of  the  State 
where  their  physical  operations  are  to  be  con- 
ducted. The  laws  of  such  States  are  invariably 
more  favorable  to  such  corporations,  and  particu- 
larly to  their  financing,  and  the  actual  executive 
head  of  the  enterprise,  or  business  office,  may  be, 
and  usually  is  at  a  distance  from  the  property 
operated,  and  often  in  another  State. 

The  law  relating  to  the  transfer  of  real  estate 
generally  is  equally  applicable  to  the  construction 
of  conveyances  and  contracts  relating  to  mining 
rights;  but  there  are  some  practical  and  legal 
questions  which  will  be  briefly  alluded  to,  as  be- 
ing particularly  important  in  the  organization  and 
promotion  of  mining  enterprises. 

It  is  now  well-settled  law  in  the  United  States 
that  the  owner  of  the  surface  of  land  is  also  the 
owner  of  everything  beneath  it  to  the  center  of 
the  earth.  A  few  States  have  express  statutes 
declaring  that  all  minerals  underlying  lands 
owned  by  citizens  of  foreign  countries  belong  to 
the  State;  and  the  rights  of  the  Government  to 
minerals  underlying  public  lands  and  those  rights 
derived  through  what  is  known  as  the  **Apex 
law"  are  the  important  exceptions  to  the  general 
rule  above  stated. 

In  the  wording  of  conveyances,  the  significance 
of  the  word  '* minerals''  is  important,  as  it  has 


198  PROMOTION   OF  ENTERPRISES. 

been  held  that  this  word  is  sufficiently  compre- 
hensive to  include  not  only  gold,  silver,  iron,  coal, 
etc.  (when  in  workable  quantities)  but  it  may  also 
include  oil  and  natural  gas.  Hence,  the  use 
of  such  phrases  as  ** mineral  substances,"  **coal 
and  other  minerals, "  *  *  lead,  zinc  and  other  miner- 
als," etc.,  may  have  important  significance  in 
such  conveyancing. 

Another  important  feature  is  the  right  of  sur- 
face owners  with  relation  to  the  minerals  named. 
Of  course,  as  regards  coal,  iron  and  other  base 
metals,  the  minerals  are  co-extensive  with  the 
surface.  In  the  case  of  gas  and  oil  this  is  not  so. 
An  operator  with  only  sufficient  surface  to  ac- 
commodate his  plant  may  reduce  to  possession  as 
much  oil  or  natural  gas  as  though  he  owned  any 
given  amount  of  surface;  then  the  Apex  law,  so 
generally  recognized  in  all  mining  states,  give 
similar  rights  to  the  owners  of  land  or  mining 
claims,  i,  e.  to  follow  all  veins,  loads  and  ledges 
wheresoever  they  may  lead  and  to  appropriate  all 
minerals  to  be  derived  therefrom  throughout  their 
entire  depth,  from  the  top  or  apex,  where  such 
apex  lies  inside  of  the  lines  or  boundary  of  such 
land  or  claims. 

It  is  not  uncommon  for  extensive  mining  de- 
velopment to  be  done  under  a  royalty  lease,  and 
without  regard  to  consequences  of  adverse  de- 
cision by  courts,  in  possible  litigation  resulting 


PROMOTION   OF  ENTERPRISES.  199 

from  future  disagreement  regarding  its  terms; 
and  without  taking  into  consideration  the  future 
possible  necessities  of  the  mining  corporation.  It 
is  equally  as  common  a  practice  to  include  in  such 
royalty  leases  a  provision  of  forfeiture  in  case  of 
a  breach  by  the  operator,  whereby  all  improve- 
ments and  development  work  (which  includes  the 
shaft,  etc.)  will  revert  to  the  lessor,  or  owner  of 
the  land.  The  wisdom  of  purchasing  in  fee  at 
least  a  sufficient  amount  of  land  upon  which  the 
mine  is  to  be  sunk  and  the  plant  located,  cannot 
be  doubted;  and  the  advantages  thereby  acquired 
should  be  apparent  to  all  interested  in  such  an 
undertaking.  The  principal  investment  of  a  min- 
ing corporation  is  made  in  sinking  its  shaft  and 
the  construction  of  its  mine  generally,  and  without 
the  precaution  above  suggested  an  almost  total 
loss  can  occur  through  some  informality  or  de- 
fect made  in  the  royalty  lease  under  which  such 
development  has  been  made. 

It  is  customary  to  take  an  option  on  the  tract 
of  coal  or  other  mineral  lands  in  advance  of  their 
purchase,  in  order  that  prospecting  may  be  done 
to  ascertain  the  extent  and  quality  of  the  mineral 
before  paying  for  the  same.  In  the  Appendix 
hereto  will  be  found  an  approved  form  of  option 
agreement  for  this  purpose.*  This  form  sup- 
poses payment  in  cash  for  mineral  lands  or  min- 

•  Page  270. 


200  PROMOTION   OF  ENTERPEISES. 

erals.  A  form  for  the  same  purpose,  where  the 
payments  are  to  be  made  in  cash,  and  stock  of 
the  corporation  to  be  formed,  for  the  development 
of  the  property,  is  also  there  inserted.*  The  plan 
last  suggested  has  a  double  advantage  to  the  oper- 
ator, one  in  reducing  the  cash  investment  in  the 
minerals  or  mining  rights,  and  the  other  in  the  se- 
curing of  local  interest  and  the  co-operation  of 
their  owners. 

Frequently  it  is  deemed  advisable  or  necessary 
to  deposit  a  deed  or  place  the  title  papers  to 
mineral  lands  in  escrow  pending  the  prospecting 
which  it  is  deemed  necessary  to  do  to  establish 
the  value  and  extent  of  the  mineral  rights  so  con- 
veyed, or  for  various  other  reasons  or  purposes 
which  may  arise.  In  such  event  the  following 
form  (with  such  modifications  as  the  particular 
circumstances  may  require)  will  serve  as  a  guide 
and  suggestion  for  the  purpose  named: 

Escrow  Agreement. 

(To  be  written  on  envelope  or  other  enclosure 
containing  deed,  lease  or  contract.) 

The  enclosed  deed  (lease  or  contract)  of 

is  hereby  placed  in  the  possession  and  keep- 

*  Page  275.  [This  form  or  plan  with  modifications  to  suit 
conditions,  has  been  used  by  the  author  in  a  number  of  impor- 
tant cases  where  the  principal  capital  required  was  to  be  obtained 
from  outside  sources  then  beyond  the  reach  of  his  client.] 


PROMOTION   OF  ENTERPRISES.  201 

ing  of ,  in  escrow,  upon  the  follow- 
ing terms  and  conditions,  viz. : 

If shall  place  or  cause  to  be  placed 

to  the  credit  of ,  in  the 

Bank  of on  or  before 191. ., 

the  sum  of Dollars,  then  and  in  that 

event,  the  said is  hereby  authorized, 

empowered  and  directed  to  deliver  the  enclosed 

deed  (lease  or  contract)  to ,  or  to  whom 

he  may  in  writing  order.    In  case  the  said 

shall  not  so  place,  or  cause  to  be  placed  to  the 

credit  of  said in  said  Bank,  the  said 

sum  of Dollars,  on  or  before 

191. .,  then  in  that  event  the  said is 

hereby  authorized  and  directed  to  return  the  en- 
closed deed  (lease  or  contract)  to  the  said 

or  to  whomsoever  he  may  designate  in  writing. 

[Seal.] 

I [Seal.] 

,  191... 

The  preparation  of  conveyances,  and  all  min- 
ing contracts  (as  well  as  the  doing  of  all  things 
pertaining  to  the  formation,  and  bringing  into 
legal  existence  of  mining  corporations,  where  the 
rights  of  the  individuals  are  to  be  conserved  and 
protected)  must  necessarily  receive  the  careful 
attention  of  those  versed  in  the  law,  as  well  as 
the  financial  and  practical  needs  of  such  under- 


202  PEOMOTION   OF  ENTERPRISES. 

takings  generally;  and  incidentally  it  might  be 
said  that  there  are  no  places  in  business  affairs 
where  the  application  of  the  well-known  maxims, 
*'what  is  worth  doing  at  all,  is  worth  doing  well, 
and  all  good  work  must  be  paid  for ' '  and  ^ '  a  man 
who  offers  his  services  at  a  specially  low  rate  gen- 
erally puts  them  at  their  true  value'' — are  exem- 
plified as  in  the  performance  of  services  by  the 
legal  profession  of  this  character.  They  may 
properly  be  termed  * ^ constructive  services,"  as 
the  results  of  such  work  are  productive  not  only 
of  substantial  benefits  to  the  employer  but  to  the 
investing  public  and  community  at  large  as  well ; 
and  the  evolution  in  business  methods  to  the  pres- 
ent high  state  of  perfection  is  primarily  due  to  the 
use  of  the  corporation,  and  the  skill  and  well 
directed  efforts  of  the  profession  in  this  modern 
field  of  specialized  activity. 


APPENDIX 


Frank's  "Science  or  Organization/'  etc. 


APPENDIX. 

Appendix.  There  is  of  necessity  a  discrep- 

ancy between  what  is  recorded  and  what  is  to  be 
desired  in  any  work  that  undertakes  to  general- 
ize on  a  subject  so  extensive  as  that  of  business 
organization;  and  here  as  in  the  law  the  exact 
question  **at  issue  ^*  is  rarely  discussed  or  settled 
by  precedent.  But  the  general  rules  and  modes 
of  procedure  herein  announced,  together  with  the 
illustrations  that  follow,  will  be  sufficient  to  en- 
able the  resourceful  individual  to  not  only  avail 
himself  of  the  plans  discussed,  but  to  suggest 
others  that  will  meet  his  particular  needs. 

Throughout  the  text  reference  has  been  made, 
to  various  illustrations  given  in  this  department 
of  the  book,  and  when  considered  in  conjunction 
with  the  text  on  the  subjects  referred  to,  they  may 
be  adequately  explained  to  enable  the  ordinary 
reader  to  appreciate  their  application;  but  there 
are  other  uses  and  purposes  to  which  such  illustra- 
tions may  be  adapted,  that  require  further  com- 
ment which  has  been  reserved  for  this  particular 
discussion. 

205 


206  APPENDIX. 

There  are  many  general  forms  published  and 
now  available  to  all  that  simply  illustrate  arbi- 
trary methods  of  conducting  corporate  affairs; 
but  such  forms  are,  as  a  rule,  simply  their  au- 
thor's personal  methods  of  accomplishing  a  given 
purpose,  which  might  be  done  in  a  great  variety 
of  ways,  and  which  would  be  equally  effective  and 
proper ;  hence  no  attempt  will  be  made  to  encum- 
ber this  volume  with  miscellaneous  forms,  but 
only  those  which  may  be  of  special  value  as  prac- 
tical illustrations. 

It  is  never  safe  for  the  layman  to  under- 
take the  use  of  forms  in  any  event,  for  the  most 
important  questions  (which  would  occur  only  to 
one  versed  in  the  law)  may  be  overlooked  and  sub- 
stantial rights  thereby  forfeited;  a  careful  ex- 
amination however,  of  forms  and  illustrations  in 
connection  with  discussions  on  a  given  subject  of 
this  character  is  of  value,  principally  to  enable 
the  reader  to  arrive  at  a  clear  and  proper  under- 
standing of  what  may  he  done  in  a  given  case  or 
under  other  conditions  that  may  arise. 

The  illustrations  that  follow  have  all  been  in 
actual  use  by  the  author  in  various  cases  coming 
within  his  personal  experience  and  are  what  may 
be  termed  unusual,  inasmuch  as  they  are  not  of 
the  stereotyped  variety  so  commonly  published 
as  *^ forms'*. 


APPENDIX.  207 

General  Contract  Between  Incorporators  to  Form  a 
Corporation.* 

This  illustrates  an  approved  method  of  taking 
the  initial  step  in  forming  a  corporation  under 
the  laws  of  any  state.  With  such  a  contract  the 
incorporators  have  settled  all  preliminary  ques- 
tions and  their  relative  rights  and  obligations, 
both  to  one  another  and  to  the  corporation  itself; 
besides  it  places  in  the  hands  of  the  attorney  who 
is  to  organize  the  corporation,  all  the  data  and 
authority  which  he  will  require,  at  least  prelimi- 
nary to  the  application  for  charter. 

The  use  of  this  contract,  while  not  essential  or 
necessary  (particularly  in  the  smaller  organiza- 
tions), can  but  be  of  advantage  where  a  large 
number  of  incorporators  are  to  participate,  or 
where  it  is  desirable  that  the  parties  should  bind 
themselves  in  advance  of  actual  subscription  to 
the  capital  stock. 

Should  special  plans  of  financing  be  desirable, 
that  fact  would  materially  change  the  phraseol- 
ogy in  regard  to  the  character  of  stock,  etc.,  and 
necessarily  require  the  attention  of  legal  counsel ; 
but  for  the  usual  and  ordinary  case,  this  illus- 
tration may  readily  be  adapted  and  prove  a  well 
devised  plan  to  facilitate  the  organzation  of  bus- 
iness corporations  generally. 

*  See  page  218. 


208  APPENDIX. 

Special  Contract  Between  Incorporators  for  the  Purpose 
of  Purchasing  and  Enlarging  a  Business.* 

This  illustration  is  susceptible  to  almost  un- 
limited adaptation.  The  elasticity  of  the  corpo- 
rate form,  as  hereinbefore  explained,  has  sug- 
gested— and  the  same  will  continue  to  further  de- 
velop— ^means  of  adjusting  the  rights  of  owners 
of  property  and  investors,  which  enable  both  to 
accomplish  almost  any  desired  result. 

The  illustration  here  shows  a  case  where  the 
owner  of  a  manufacturing  plant,  and  individuals 
with  capital,  join  forces  in  a  corporation  which  is 
to  own  and  operate  the  business  formerly  owned 
by  such  individual.  By  this  method  it  will  be 
seen  that  the  owner  of  the  supposed  business  is 
materially  benefited  by  the  transaction,  and  the 
individuals  furnishing  the  capital  may  be  ade- 
quately protected  in  their  investments. 

It  will  be  readily  suggested  to  the  most  casual 
reader  that  this  plan  may  also  be  utilized  in  ef- 
fecting the  sale  of  a  business  either  immediately 
or  after  the  corporation  is  organized  and  under 
operation.  Such  sale  can  be  made  by  the  transfer 
of  stock  of  the  former  owner  of  the  plant;  and, 
under  ordinary  circumstances,  his  stock  (received 
for  the  plant)  should  be  of  greater  value  than  the 
plant  in  his  hands  before  organization.  Besides,  a 

*  See  page  221. 


APPENDIX.  209 

sale  should  be  more  readily  effected  after  organi- 
zation than  before. 

Here,  we  also  see  a  practical  illustration  of  the 
opportunity  to  capitalize  and  reduce  to  a  substan- 
tial property  right,  the  good-will  and  trade  name 
of  the  business,  all  of  which  would  be  of  little 
or  no  money  value  unless  protected  in  this  way. 

What  has  already  been  said  on  the  subject  of 
corporate  financing,  will  enable  the  reader  to  ap- 
ply the  various  suggestions  offered  to  meet  the 
requirements  of  any  condition  arising  in  the  prac- 
tical use  of  this  illustration,  where  a  going  busi- 
ness is  to  be  purchased  or  taken  over  by  a  cor- 
poration when  formed  for  that  purpose. 

Reorganization  Certificate.* 

The  use  of  this  instrument  is  referred  to  in  the 
text  as  applicable  in  a  reorganization  of  an  exist- 
ing corporation  where  reasons  exist  for  the  same. 
The  signing  of  such  a  certificate  in  duplicate  and 
the  surrender  of  the  stock  certificates  held  by  the 
stockholder,  places  in  the  hands  of  the  trustee 
selected,  ample  authority  to  proceed  with  such 
reorganization  along  the  lines  agreed  upon  and 
set  forth  in  the  reorganization  certificate,  and  such 
terms    may    be    whatever    the    particular    cir- 

*  See  page  227. 


210  APPENDIX. 

cumstances  demand  or  the  individuals  interested 
may  impose. 

This  method  has  proven  to  be  advantageous 
(from  the  reorganizer's  standpoint  at  least)  in 
a  number  of  important  cases.  One  of  the  chief 
obstacles  in  the  way  of  the  reorganization  of  a 
corporation,  where  a  large  number  of  stockhold- 
ers exist,  is  the  fact  that  a  few  minority  stock- 
holders may  greatly  hinder  or  prevent  the  ac- 
complishment of  such  an  object  and  involve  the 
corporation  in  expensive  litigation  should  an  at- 
tempt be  made  by  the  officers,  or  those  in  control, 
to  force  a  reorganization;  in  adopting  the  method 
suggested,  the  reorganization  may  (nominally  at 
least),  be  placed  in  the  hands  of  a  disinterested 
person,  and  neither  the  stockholders  nor  the  cor- 
poration become  involved  in  the  attempt ;  and  be- 
sides, this  method  enables  the  reorganizers  to 
negotiate  and  treat  with  each  stockholder  sepa- 
rately, and  to  prevent  undue  advantage  being 
taken  by  any  signer  of  this  certificate  after  the 
same  is  executed. 

Here,  as  in  the  illustration  last  referred  to, 
many  additional  terms  and  conditions  may  be 
added  to  meet  the  requirements  of  any  case,  such 
as  the  issuance  of  preferred  or  other  special  stock 
or  bonds,  and  the  relinquishing  of  the  rights  of 
the  holders  of  stock  for  such  special  stock  or 
bonds,  or  the  making  of  a  trust  company  the  trus- 


APPENDIX.  211 

tee  for  the  stockholders  or  corporation  as  the 
case  may  be;  and  the  depositing  of  stock  with 
such  trust  company  in  exchange  for  special  Trus- 
tee Certificates  or  receipts  is  a  common  practice, 
particularly  among  large  corporations,  where  a 
sale  of  the  entire  assets  to  another  corporation  in 
exchange  for  its  stock  is  to  be  effected,  or  a  change 
in  the  financial  plans  is  desired. 

Where  the  owner  of  a  business  desires  to  ulti- 
mately dispose  of  his  interest  therein,  or  in  case 
the  reorganizers  of  a  business  desire  to  provide 
for  the  payment  of  the  purchase  money  of  the 
tangible  assets  of  a  business  reorganized,  with- 
out encumbering  the  same  by  a  mortgage  to  se- 
cure a  bond  issue,  it  has  often  proven  advanta- 
geous within  the  experience  of  the  author  to  pro- 
vide for  special  stock,  such  as  is  referred  to  in  the 
text,  as  being  preferred  as  to  dividends  and  as- 
sets, or  to  create  still  another  species,  i.  e.  a  spe- 
cial obligation  in  the  nature  of  stock,  whereby  the 
corporation  obligates  itself  to  pay  a  certain  divi- 
dend each  year  on  such  shares  (out  of  the  profits) 
and  not  to  exceed  a  certain  specified  dividend  on 
the  other  stock  of  the  corporation ;  then  any  sur- 
plus remaining  after  the  payment  of  such  divi- 
dends must  be  paid  to,  or  for  the  benefit  of,  the 
holders  of  such  special  certificates  from  year  to 
year,  until  the  same  have  been  retired. 

In  the  hypothetical  case  given  in  the  reorgani- 


212  APPENDIX. 

zation  certificate  above  referred  to,  the  corpora- 
tion to  be  reorganized  is  there  supposed  to  be  a 
foreign  corporation,  and  the  principal  objects  to  be 
attained  by  the  plan  suggested,  is  a  reduction  of 
its  capitalization  in  order  that  it  may  be  placed 
upon  a  sane  working  basis. 

Proposition  to  Newly  Organized  Corporation,  Etc.* 

This  exhibit  illustrates  an  approved  and  con- 
venient method  of  formally  bringing  before  the 
stockholders  and  boards  of  directors  of  both  the 
selling  and  purchasing  corporations,  to  obtain  the 
necessary  authority  to  sell  and  buy  the  entire 
assets  where  such  enterprises  propose  to  convey 
their  property  to  a  newly  formed  company  for 
the  purpose  of  consolidation  or  reorganization. 

It  will  be  seen  that  the  illustration  in  question 
supposes  the  existence  of  two  corporations  whose 
business  is  about  to  be  absorbed  and  taken  over  by 
the  newly  formed  company. 

This  method  of  procedure  has  a  two-fold  ob- 
ject at  least ;  the  first,  is  to  present  in  a  concrete 
form  a  summary  of  the  assets  to  be  conveyed  with 
their  valuation,  and  the  terms  of  their  proposed 
transfer,  set  out  with  much  less  formality  than 
would  be  necessary  if  it  were  attempted  to  con- 
summate such  a  transaction  by  a  formal  written 

♦  See  page  229. 


APPENDIX.  213 

contract  of  purchase  and  sale ;  and  the  formal  ac- 
ceptance of  such  a  proposition,  by  the  purchasing 
authority  of  the  newly  formed  company,  accom- 
plishes everything  that  could  be  done  through  the 
use  of  such  a  contract. 

The  second,  is  to  facilitate  the  preparation  of 
the  necessary  resolutions  as  well  as  the  corporate 
records,  to  effectuate  such  a  transaction  for  the 
newly  organized  company  as  well  as  those  of  the 
two  retiring  corporations,  who  are  to  sell  and 
convey  their  property  under  such  circumstances 
as  is  here  contemplated. 

Besides,  it  is  often  convenient  to  classify,  ap- 
praise, and  set  up  in  such  a  proposition  as  is 
here  contemplated,  the  various  assets  to  be  taken 
over,  so  that  they  may  readily  be  carried  into  the 
accounting  system  of  the  new  corporation,  di- 
rectly from  such  formal  proposition  or  from  the 
inventory  therein  referred  to. 

OflFering  of  Stock  for  Sale,  Etc.* 

It  being  necessary  to  present  to  prospective  m- 
vestors,  the  salient  points  and  attractive  features 
of  a  business,  in  every  case  where  capital  is  sought 
after  through  the  sale  of  stock  or  other  corporate 
securities,  the  precedent  here  shown  (having  been 

*  See  page  234. 


214  APPENDIX. 

successfully  employed  by  the  Author  in  an  actual 
case  where  the  opportunities  detailed  existed)  will 
serve  as  an  illustration.  Innumerable  forms  may 
be  employed  for  this  purpose,  and  it  is  of  course 
impossible  to  present  any  stereotyped  plan  or 
form  of  phraseology  that  would  meet  the  require- 
ments, expectations,  or  indorsement  of  any  con- 
siderable number  of  individuals;  but,  it  may  be 
said,  that  experience  has  demonstrated  that  any- 
thing short  of  a  plain,  concise,  and  more  or  less 
detailed  account  of  the  offering  made,  is  wanting 
in  one  of  the  essential  elements  that  appeals  to 
the  average  man  with  money  to  invest;  and 
further,  that  equivocal  statements  of  any  impor- 
tant fact  are  usually  detected  and  their  use  often 
render  such  an  offering  unsuccessful. 

It  will  be  found  upon  investigation  that  the 
modern  methods  employed  by  staple  financial  in- 
stitutions in  presenting  offerings  of  corporate 
securities  savor  less  of  literary  merit  than  ascer- 
tainable and  controlling  facts. 

Appraisal  of  Property.* 

This  form  may  be  utilized  and  adopted  by 
either  a  Board  of  Directors  in  their  official  ca- 
pacity, or  by  disinterested  persons  in  appraising 

•  See  page  242. 


APPENDIX.  215 

property,  and  form  the  basis  of  a  resolution  for 
purchasing  an  established  business  or  property 
for  the  use  of  a  corporation. 

Where  such  appraisal  has  been  made  in  detail, 
that  is,  where  an  itemized  schedule  of  the  prop- 
erty appraised  is  made,  this  should  be  attached 
and  referred  to,  in  the  appropriate  part  of  the 
narrative,  in  relation  to  the  subject  matter  of  the 
appraisal. 

Appraisal  companies  usually  have  comprehen- 
sive forms  for  setting  up  and  classifying  assets, 
that  make  the  form  referred  to  here,  applicable  as 
a  summary  and  convenient  as  a  basis  for  the  reso- 
lution following. 

Resolution  Ratifying  Commissioners*  Acts,  Etc.* 

This  resolution  is  sufficient  for  the  use  of  Di- 
rectors (when  ratifying  the  acts  of  the  commis- 
sioners appointed  by  the  Secretary  of  State  or 
organizers  generally,  in  advance  of  complete  or- 
ganization, as  in  Illinois)  or  where  property  has 
been  taken  and  the  purchase  price  has  been  paid 
in  whole  or  part  with  stock  of  the  corporation,  and 
the  amount  agreed  upon  credited  on  the  stock  sub- 
scription accounts  of  the  owners  of  the  property 
conveyed. 

*  See  page  244. 


216  APPENDIX. 

Installment  Certificate  and  Assignment.* 

Such  a  certificate  as  is  here  suggested  is  fre- 
quently issued  by  mining  corporations,  or  those 
interested  in  disposing  of  a  portion  of  the  capital 
stock  after  the  corporation  is  formed.  Its  issu- 
ance will  prevent  stockholders  offering  for  sale 
or  disposing  of  their  stock,  pending  the  period  re- 
served for  the  sale  of  the  stock  remaining  in  the 
Treasury  of  the  corporation  as  hereinbefore  ex- 
plained. 

General  By-Laws,  f 

Where  the  by-laws  of  a  corporation  or  the  per- 
manent features  thereof  are  made  a  part  of  the 
charter,  the  form  here  suggested,  with  such  modi- 
fications and  conditions  as  the  incorporators  may 
desire,  can  be  adopted  by  the  stockholders;  but 
w^here  the  adoption  of  by-laws  is  left  to  the  Board 
of  Directors  of  the  corporation  after  they  are 
elected,  such  by-laws  should  be  presented  to  the 
Board,  and  formally  adopted  by  it  at  the  first 
meeting  after  the  Certificate  of  Complete  Organ- 
ization or  charter  has  been  filed  for  record  in  the 
proper  recording  office  of  the  state  creating  the 
corporation. 

Innumerable  additions  or  changes  may  be  made 

*  See  page  250. 
t  See  page  253. 


APPENDIX.  217 

to  meet  the  requirements  of  incorporators;  but 
the  form  here  suggested  with  such  modificacions 
as  will  fit  the  particular  case,  is  adequate  for  the 
needs  of  the  ordinary  business  corporation. 

The  importance  of  by-laws  has  already  been 
given  in  the  text.  So  far  as  their  legal  necessity 
is  concerned,  their  primary  function  is  to  control 
and  authorize  the  time  and  method  of  calling  and 
holding  meetings;  without  them  great  inconven- 
ience may  result  and  expense  be  necessary  to  give 
the  actual  notice  which  the  law  requires,  where 
there  are  no  provisions  made  for  otherwise  serv- 
ing such  notice  by  the  corporation,  through  its 
by-laws  or  by  statute. 

The  remaining  forms  and  illustrations  are  given 
for  the  convenience  and  ready  use  of  incorpo- 
rators; individual  reference  to  them  is  deemed 
unnecessary  and  impracticable  within  the  limita- 
tions of  this  volume. 


GENERAL  CONTRACT 

TO 

FORM  A  CORPORATION. 

This  Agreement  made  this  first  day  of  Novem- 
ber, A.  D.,  1909,  by  and  between  the  undersigned, 
John  Brown,  William  Burbank,  Edward  Cunning- 
ham and  Raymond  Williams,  all  of  the  City  of 
Chicago  and  State  of  Illinois. 

WITNESSETH,  That  in  consideration  of  the  mu- 
tual undertakings  and  agreements  of  the  parties 
hereto,  as  hereinafter  set  forth,  and  in  further 
consideration  of  the  sum  of  one  dollar  by  each  of 
the  said  parties  to  the  other  in  hand  paid  (at  the 
time  of  the  execution  hereof),  the  receipt  of  which 
is  hereby  severally  acknowledged,  the  said  parties 
to  this  contract  hereby  agree  by  and  among  them- 
selves and  with  each  other  as  follows,  to-wit: 

First,  That  a  corporation  shall  be  formed  by  us 
under  the  laws  of  Illinois  substantially  as  fol- 
lows : 

(a)  The  name  thereof  to  be  the  Perfect  Auto- 
mobile Company. 

(b)  The  capital  stock  of  said  corporation  to  be 
One  Hundred  Thousand  ($100,000.00)  Dollars, 
divided  into  one  thousand  (1,000)  shares  of  One 

218 


APPENDIX.  219 

Hundred  ($100.00)  Dollars  each,  said  stock  to 
be  all  Common  Stock  of  uniform  character  and 
usual  form. 

(c)  The  purpose  of  said  corporation  to  be  sub- 
stantially for  the  manufacture  and  sale  of  auto- 
mobiles and  their  parts. 

(d)  Said  corporation  shall  have  a  Board  of  Di- 
rectors five  in  number,  who  shall  all  be  stock- 
holders of  record  at  the  time  of  their  election. 

(e)  The  officers  of  said  corporation  shall  be  a 
President,  Vice-President,  Secretary,  Treasurer 
and  General  Manager. 

(f )  The  location  of  the  principal  office  to  be  at 
Chicago. 

(g)  The  duration  of  said  corporation  to  be  99 
years. 

Second,  We  hereby  agree  with  each  other,  and 
the  one  with  the  other,  that  we  will  take  the  num- 
ber of  shares  of  the  capital  stock  of  said  corpo- 
ration set  opposite  our  respective  names  hereunto 
subscribed,  and  will  pay  to  the  commissioners 
duly  appointed  by  the  Secretary  of  State  of  Illi- 
nois in  that  behalf,  fifty  (50%)  per  cent,  of  the 
par  value  of  the  said  shares  so  subscribed  by  us 
respectively  at  the  time  of  holding  the  first  meet- 
ing of  the  said  subscribers  to  elect  a  Board  of 
Directors  for  said  corporation;  and  we  further 
agree  to  pay  the  balance  of  our  said  subscriptions 
whenever  called  upon  so  to  do  by  the  Board  of 


220 


APPENDIX. 


Directors  of  said  corporation,  after  the  same  shall 
be  formed. 

Third,  We  further  nominate,  constitute  and  ap- 
point, ( )  as  our  (attorney  or)  agent, 

and  the  agent  (or  attorney)  of  the  said  corpora- 
tion so  to  be  formed,  to  create  or  cause  to  be 
created  the  said  corporation  in  accordance  with 
the  laws  of  Illinois  and  this  agreement,  and  to 
do  and  perform  all  things  necessary  to  bring  said 
corporation  into  legal  existence;  and  we  further 
authorize  and  empower  our  said  agent  (or  at- 
torney) to  draw  on  the  funds  in  the  hands  of  the 
legally  constituted  officers  or  agents  of  said  cor- 
poration, for  the  necessary  expenses  attending 
said  incorporation,  and  we  further  agree  that 
any  and  all  contracts  which  our  said  (attorney  or) 
agent  may  make  in  such  matter  shall  be  binding 
upon  said  corporation  and  also  upon  us  jointly 
and  severally. 

In  Witness  Whekeof,  we,  the  undersigned, 
hereby  severally  bind  ourselves,  our  heirs,  execu- 
tors and  administrators. 


NAME 

ADDRESS 

SHARES 

AMOUNT 

SPECIAL  CONTRACT 

TO 

FORM  A  CORPORATION. 

This  Agreement  made  and  entered  into  this 
first  day  of  December,  A.  D.,  1909,  by  and  between 
John  Brown,  party  of  the  first  part,  and  William 
Burbank,  Edward  Cunningham,  Frank  Smith, 
and  Raymond  Williams,  parties  of  the  second 
part,  all  residents  of  the  City  of  Chicago  in  the 
State  of  Illinois : 

WITNESSETH/ That  Whereas,  the  said  party  of 
the  first  part  is  the  owner  of  and  now  operating 
under  his  own  name,  the  manufacturing  plant  and 
business  located  at  279  Michigan  Avenue  in  the 
City  of  Chicago,  said  business  consisting  of  spe- 
cial tools  and  machinery  for  the  manufacture  of 
automobiles  and  their  parts,  and  also  a  stock  of 
raw  material  for  the  conduct  of  said  business,  as 
well  as  various  new  and  second  hand  machines 
particularly  enumerated  and  set  forth  in  the  in- 
ventory attached  hereto  marked  ** Exhibit  A'*; 

And  Whereas,  the  said  parties  of  the  second 
part  are  desirous  of  becoming  interested  in  and 
identified  with  said  business  on  substantially  the 
following  terms  and  conditions : 

221 


222  APPENDIX. 

Now,  Thekefoke,  it  is  Hereby  Agreed  ;  That  in 
consideration  of  the  mutual  undertakings  and 
agreements  of  the  parties  hereto,  as  hereinafter 
set  forth,  and  in  further  consideration  of  the  sum 
of  One  Dollar  by  each  of  the  said  parties  to  the 
other  in  hand  paid  (at  the  time  of  the  execution 
hereof),  the  receipt  of  which  is  hereby  severally 
acknowledged,  the  said  parties  of  this  contract 
hereby  agree  by  and  among  themselves  and  with 
each  other  as  follows,  to-wit: 

First,  that  a  corporation  shall  at  once  be  formed 
by  us  under  the  laws  of  Illinois  substantially  as 
follows : 

(a)  The  name  thereof  to  be  The  Perfect  Auto- 
mobile Company. 

(b)  The  capital  stock  of  the  said  corporation 
to  be  Two  Hundred  Thousand  ($200,000.00)  Dol- 
lars, divided  into  Two  Thousand  (2000)  shares 
of  one  hundred  ($100.00)  Dollars  each,  said  stock 
to  be  all  common  stock  of  uniform  character  and 
usual  form. 

(c)  The  purpose  of  said  corporation  to  be  sub- 
stantially for  the  manufacture,  purchase  and  sale 
of  automobiles  and  their  parts. 

(d)  Said  corporation  shall  have  a  Board  of  Di- 
rectors five  in  number,  who  shall  all  be  stockhold- 
ers of  record  at  the  time  of  their  election. 

(e)  The  officers  of  said  corporation  shall  be  a 


APPENDIX.  223 

President,  Vice-President,  Secretary,  Treasurer 
and  General  Manager. 

(f)  The  location  of  the  principal  office  to  be  at 
Chicago. 

(g)  The  duration  of  said  corporation  to  be  99 
years. 

Second,  the  parties  hereto  agree  to  subscribe, 
take  and  pay  for  the  said  shares  of  stock  in  the 
following  proportion  and  manner,  namely:  said 

party  of  the  first  part  shall  subscribe  for 

shares  of  said  capital  stock;  the  balance  of  said 
shares  of  stock  shall  be  subscribed  for  by  the  said 
parties  of  the  second  part  as  follows:  said  Bur- 
bank.  .  •  .shares,  said  Cunningham shares,  said 

Smith. . .  .shares,  and  said  Williams. . .  .shares. 

Third,  the  said  parties  of  the  second  part  sev- 
erally agree  to  pay  unto  the  Commissioners  ap- 
pointed by  the  Secretary  of  State  of  Illinois,  for 
the  benefit  of  said  proposed  corporation,  fifty 
(50%)  per  cent  of  the  par  value  of  said  shares 
of  stock  so  subscribed  for  by  them  at  the  time  and 
whenever  the  said  commissioners  shall  convene 
and  hold  the  first  meeting  of  the  subscribers  of 
said  capital  stock,  and  they  further  agree  to  pay 
the  balance  remaining  due  and  unpaid  upon  said 
shares  so  subscribed  for  by  them  in  cash  into  the 
Treasury  of  said  corporation,  as  soon  as  they  may 
be  called  upon  so  to  do  by  the  Board  of  Directors 
of  said  Corporation  when  formed. 


224  APPENDIX. 

Fourth,  as  soon  as  said  corporation  shall  be 
fully  organized  the  said  party  of  the  first  part 
hereby  agrees  to  convey,  by  good  and  sufficient 
instrument  of  conveyance  a  clear  and  perfect  title 
to  said  manufacturing  plant  and  business  as  enu- 
merated and  set  forth  in  the  inventory  attached 
hereto  as  Exhibit  **A'',  aforesaid,  and  to  accept 

in  payment  therefor  ( )  shares  of  the 

capital  stock  of  said  corporation  at  its  par  value, 

namely  ( )  Dollars,  and  the  balance  of 

said    purchase   money   for    said    manufacturing 

plant  and  assets  amounting  to Dollars,  in 

cash ;  the  same  to  be  paid  upon  the  tendering  of  a 
good  and  legal  conveyance  of  said  plant  and  as- 
sets by  the  said  party  of  the  first  part,  to  said 
corporation  when  formed. 

Fifth,  it  is  agreed  between  the  parties  hereto 
that  said  parties  shall  constitute  the  first  Board 
of  Directors  of  said  corporation,  and  that  in  con- 
sideration of  the  experience  and  former  connec- 
tion with  the  said  business  by  the  said  party  of 
the  first  part,  that  he  shall  be  the  General  Mana- 
ger of  the  same  and  receive  a  salary  from  said 
corporation  for  his  services  in  that  behalf  amount- 
ing to Dollars  per  annum,  payable  in  equal 

monthly  installments  of Dollars  per  month, 

and  that  a  contract  shall  be  made  between  the 
said  corporation  and  the  said  party  of  the  first 
part  whereby  his  said  services  as  General  Man- 


APPENDIX.  225 

ager  shall  be  so  secured  and  continued  for  a  pe- 
riod of  two  (2)  years  from  and  after  the  incorpo- 
ration of  said  company  as  aforesaid;  that  as  said 
General  Manager  said  party  of  the  first  part  shall 
employ  all  labor  and  purchase  all  material  and 
supplies  necessary  for  the  conduct  of  said  busi- 
ness, and  have  general  supervision  of  the  mechan- 
ical department  thereof,  subject  to  the  control  of 
the  Board  of  Directors ;  and  that  said  party  of  the 
first  part  shall  devote  his  entire  time,  attention 
and  best  endeavors  to  the  business  of  said  corpo- 
ration for  and  during  the  period  aforesaid. 

Sixth,  it  is  understood  and  agreed  that  the  said 
party  of  the  first  part  shall  assume  and  pay  all 
outstanding  obligations  of  every  kind  and  nature 
existing  at  the  time  of  the  sale  and  conveyance  of 
said  manufacturing  plant  as  aforesaid,  and  that 
he  is  to  retain  only  the  current  book  accounts  and 
moneys  due  the  said  business  at  the  time  of  said 
conveyance  aforesaid ;  that  all  other  kinds  of  prop- 
erty and  property  rights  now  owned  and  enjoyed 
by  said  business,  including  its  good-will,  shall  be 
legally  conveyed  and  inure  to  the  said  corporation 
when  formed,  and  that  he  shall  warrant  and  de- 
fend the  title  to  said  business  and  assets  against 
all  liens  and  claims  whatsoever. 

Seventh,  we  further  nominate,  constitute  and 

appoint ,  as  our  (attorney  or)  agent,  and 

the  agent  (or  attorney)  of  the  said  corporation 


226  APPENDIX. 

SO  to  be  formed,  to  create  or  cause  to  be  created 
the  said  corporation  in  accordance  with  the  laws 
of  Illinois  and  this  agreement,  and  to  do  and  per- 
form all  things  necessary  to  bring  said  corpora- 
tion into  legal  existence;  and  we  further  author- 
ize and  empower  our  said  agent  (or  attorney)  to 
draw  on  the  funds  in  the  hands  of  the  legally  con- 
stituted officers  or  agents  of  said  corporation,  for 
the  necessary  expenses  attending  said  incorpora- 
tion, and  we  further  agree  that  any  and  all  con- 
tracts which  our  said  (attorney  or)  agent  may 
make  in  such  matter  shall  be  binding  upon  said 
corporation  and  also  upon  us  jointly  and 
severally. 

This  contkact  shall  be  binding  upon  the  heirs, 
executors,  administrators,  successors  and  assigns 
of  the  respective  parties  hereto. 

In  witness  whereof  the  parties  hereto  have 
hereunto  set  their  hands  and  seals  the  day  and 
year  first  above  written. 


Reorganization  Certificates. 

This  is  to  Certify  That  Richard  Roe  of  Chi- 
cago, Illinois  (hereinafter  designated  as  the  trans- 
feror), has  transferred  and  delivered  to  William 
Smith  (hereinafter  designated  as  the  transferee), 
Certificate  No.  23  for  1,000  shares  of  the  capital 
stock  of  The  Doe  Electrical  Mfg.  Co.,  for  the 
purposes  and  upon  the  conditions  following,  viz. : 

First.  That  the  transfer  above  named  is  made 
to  enable  the  said  transferee  to  effect  a  reor- 
ganization of  the  said  company,  by  reincorporat- 
ing the  same  under  the  laws  of  the  State  of  Illi- 
nois; said  Illinois  corporation  to  be  known  by 
the  same  or  similar  name  as  the  present  organi- 
zation, and  to  have  a  capital  stock  of  $125,000; 
that  the  new  corporation,  when  formed,  shall  have 
$10,000  in  cash  paid  in  its  treasury,  after  all  ob- 
ligations of  the  present  company  are  discharged ; 
and  also  to  have  in  its  treasury  $15,000 — face 
value — of  its  capital  stock  for  sale,  at  par;  that 
said  corporation,  when  reorganized  by  said  trans- 
feree, shall  possess  and  own  by  transfer  from  the 
Board  of  Directors  of  the  present  corporation  all 
the  assets  thereof. 

Second.  That  the  said  transferee  agrees  to 
deliver,  and  the   said  transferor  agrees  to  re- 

227 


228  APPENDIX. 

ceive,  in  lieu  of  said  stock  certificate,  a  new  cer- 
tificate in  the  said  reorganized  company,  for  50 
shares  of  its  capital  stock  at  the  par  value  of 
$10.00  per  share,  fully  paid  and  non-assessable. 

Third.  It  is  further  understood  that  this  agree- 
ment is  made,  and  the  said  reorganization  is  con- 
templated, for  the  purpose  of  discharging  the  ob- 
ligations of  the  said  The  Doe  Electrical  Mfg. 
Co.,  and  to  preserve  its  assets  for  the  benefit  of 
all  its  stockholders,  equally,  and  that  to  accom- 
plish said  objects  the  said  transferee  is  hereby 
vested  with  all  the  powers  and  rights  of  owner- 
ship, in  and  to  the  said  stock  so  transferred,  and 
with  full  power  to  consummate  said  reorganiza- 
tion in  accordance  herewith. 

Fourth.  It  is  further  agreed  that  the  said 
transferee  shall  perfect  said  reorganization,  as 
soon  as  may  be  after  all  the  outstanding  stock  in 
the  present  corporation  is  transferred  and  sur- 
rendered under  the  terms  of  this  certificate;  that 
upon  his  failure  or  inability  so  to  do,  within  a 
reasonable  time,  he  shall  redeliver  and  transfer 
said  certificate  to  the  said  transferor. 

In  Testimony  Whereof,  the  said  parties  hereto, 
have  hereunto  set  their  hands,  and  affixed  their 
seals,  at  Chicago,  Illinois,  this  4th  day  of  May,  A. 
D.  1907. 

EicHARD  EoE,  [Seal.] 

William   Smith,     [Seal.] 


Proposition  to  Newly  Organized   Corporation. 

Chicago,  Illinois,  December  16,  1913. 
The  American  Manufacturing  Company, 

Chicago. 
Dear  Sirs: 

The  undersigned.  The  Brevoort  Manufacturing 
Company  and  The  Close  Company  (corporations 
created  and  existing  under  and  by  virtue  of  the 
laws  of  the  state  of  Illinois),  by  order  of  their 
respective  boards  of  directors  and  in  pursuance 
of  a  resolution  duly  passed  by  unanimous  vote  of 
all  of  their  stockholders,  hereby  submit  to  your 
corporation  the  following  proposition,  namely : 

The  undersigned  hereby  offer  to  sell,  assign, 
convey,  transfer  and  set  over  unto  your  corpora- 
tion the  following  enumerated  real  and  personal 
property  and  assets,  at  the  valuations  set  opposite 
the  respective  items  thereof,  namely: 

1.    Eeal  Estate  : 

(a)  Lots  numbered  seven  (7)  and 
eight  (8)  in  block  nineteen  (19), 
in  the  city  of  South  Chicago,  Illi- 
nois, with  the  buildings  thereon, 

upon  the  valuation  of $86,785.94 

229 


230  APPENDIX. 

(b)  All  of  lot  nine  (9)  in  block  nine- 
teen (19)  in  the  city  of  South  Chi- 
cago, Illinois,  with  the  buildings 

thereon,  upon  the  valuation  of . . .         12,000.00 

(c)  All  of  lot  ten  (10)  in  block  nine- 
teen (19)  in  the  city  of  South 
Chicago,  Illinois,  with  the  build- 
ings thereon,  upon  the  valuation  of        10,964.59 

(d)  All  of  the  north  one-half  (1/2) 
of  lot  eleven  (11)  in  block  nine- 
teen (19)  in  the  city  of  South  Chi- 
cago, Illinois,  with  the  buildings 

thereon,  upon  the  valuation  of . . .  8,641.69 

2.    Personal  Property  : 

(a)  Entire  manufacturing  plant  now 
located  on  the  real  estate  above 
described,  and  consisting  of  equip- 
ment for  manufacturing,  power 
plant,  boilers,  engines,  etc.,  etc., 

valued  at 116,560.53 

(b)  Eaw  material  on  hand,  as  per 
inventory,  and  located  in  the  city 
of  South  Chicago,  Illinois,  valued 
at  $ 

(c)  Goods  in  bond  and  valued  at  \  107,461.23 
$ 

(d)  Manufactured  package  goods  on 

hand,  consisting  of 

and  valued  at  $ 


APPENDIX.  231 

(e)  Book  accounts  and  accounts  re- 
ceivable, amounting  to 92,757.35 

(f)  Trade  marks  and  copyrights  on 

brands,  valued  at 48,000.00 

Total   

Such  property  and  assets  to  be  conveyed  clear 
and  free  of  all  claims  and  liens  of  whatsoever  na- 
ture, and  the  undersigned  corporations  are  to 
receive  in  full  payment  therefor  the  following  con- 
siderations, namely: 

1.  That  your  company  assume  all  the  out- 
standing liabilities  of  the  undersigned,  which 
amount,  according  to  the  certificate  of  the  treas- 
urers thereof,  to  $ 

2.  Five  hundred  (500)  shares  of  the  preferred 
capital  stock  of  your  corporation  at  the  par  value 
thereof. 

3.  Two  hundred  (200)  shares  of  the  common 
capital  stock  of  your  corporation  at  the  par  value 
thereof. 

The  said  capital  stock  to  be  issued  and  de- 
livered to  or  upon  the  order  of , 

as  agent,  for  and  on  behalf  of  the  stockholders  of 
the  undersigned  corporations  and  a  receipt  by 
such  agent  for  said  stock  issued  to  the  stock- 
holders of  record  of  the  undersigned  shall  be  a 
full  discharge  of  your  corporation  under  this 
proposition. 


232  APPENDIX. 

It  being  impracticable  to  describe,  inventory 
and  transfer  at  this  time  each  and  every  item  of 
property  belonging  to  this  company,  and  it  being 
the  intention  so  to  do,  it  is  agreed  that  any  and  all 
additional  property  subsequently  tendered  your 
company  shall  be  accepted  and  taken  over  at  the 
agreed  value  thereof  from  time  to  time  and  paid 
for  in  cash  or  shares  of  your  capital  stock,  as 
may  be  agreed  upon  by  the  officers  of  our  respec- 
tive corporations  at  the  time  of  such  transfer. 

If  this  proposition  is  accepted  by  your  corpo- 
ration, The  American  Manufacturing  Company, 
such  acceptance  when  noted  hereon  shall  consti- 
tute a  contract  made  in  the  state  of  Delaware  be- 
tween your  corporation  and  the  undersigned. 
Eespectf  ully  submitted, 
The  Beevoort  Manufacturing  Company, 

By 

President. 
Attest: 

Secretary. 
The  Close  Company, 

By 

President 

Attest  : 

Secretary. 


APPENDIX.  233 

The  foregoing  proposition  is  by  order  of  the 

board  of  directors  of  this  company  duly  accepted. 

The  American  Manufacturing  Company, 

By  

President. 
Attest  : 

Secretary. 


PRIVATE  OFFERING 
$100,000.00 

THE  AMERICAN  MANUFACTURING 
COMPANY 

Chicago,  Illinois 

Seven  Per  Cent  Cumulative  Preferred  Stock 

Preferred  as  to  both  Dividends  and  Assets 

Par  Value  $100  per  Share 

Fully  Paid  and  Non-Assessable 

Offered  at  Par 


Capitalization. 

Authorized  Issued 
1500  Shares  7%     Cumulative 

Preferred  Stock $150,000  $  50,000 

3500  Shares  Common  Stock.  350,000  200,000 

NO  BONDED  INDEBTEDNESS. 

The  American  Manufacturing  Company  was 
organized  under  the  laws  of  Delaware  in  Decem- 
ber, 1913.  It  has  taken  over  and  now  owns  all  of 
the  real  and  personal  property  formerly  owned 

234 


APPENDIX.  235 

and  controlled  by  both  The  Brevoort  Manufac- 
turing Company  and  The  Close  Company. 

The  company  has  qualified  under  the  foreign 
corporation  laws  of  the  state  of  Illinois  and  is 
now  in  full  operation  and  carrying  on  the  busi- 
ness of  both  the  above  named  corporations. 
Officers:  William  Sweet,  President; 

Robert  Jones,  Vice-President; 
Henry  James,  Treasurer; 
John  Williams,  Secretary. 
Directors:  William  Sweet,  Chicago,  Illinois. 
Robert  Jones,  Chicago,  Illinois. 
Henry  James,  Chicago,  Illinois. 
John  Williams,  Chicago,  Illinois. 

and 
M.  J.  Williams,  Wilmington,  Del. 

The  following  is  a  brief  outline  of  the  growth 
and  earning  capacity  of  The  Brevoort  Manufac- 
turing Company  and  The  Close  Company  from 
January  1,  1905  to  December  1,  1913,  which  busi- 
ness, as  above  stated,  is  now  owned  by  The  Amer- 
ican Manufacturing  Company: 

Number  of  Cases  of  Star  Package  Goods 
Manufactured  and  Sold: 

Year  ending  July  1,  1906 8,900 

Year  ending  July  1,  1913 138,000 


236  APPENDIX. 

July  1,  1913  to  December  31,  1913 174,045 

(when    business   was    taken   over   by 
present  company.) 

Increase  in  Bulk  Product  Capacity: 

Year  ending  July  1, 1906. 500  Cases. 

Year  ending  January  1, 1914 1,000  Cases. 

Summary  of  Net  Earnings  as  shown  by  audits  of 
certified  accountants: 

From  July  1,  1905  to  July  1,  1911. . . .  $40,925.98 
From  July  1,  1911  to  July  1,  1912. . . .  55,759.71 
From  July  1,  1912  to  July  1,  1913. . . .  51,505.83 
From  July  1, 1913  to  Jan.  1, 1914  (6  mo.)  43,989.70 

Note:  In  1911  The  Brevoort  Company  paid  off 
and  cancelled  a  bond  issue  of  $100,000.00. 

The  following  is  a  financial  statement  of  The 
American  Manufacturing  Company  at  the  com- 
mencement of  business  January  1,  1914: 

Eesources  : 
Real  estate  and  buildings: 
Lots  7  and  8,  block  19  $86,785.94 

Lot  9,  block  19 12,000.00 

Lot  10,  block  19 10,964.59 

1/2  lot  11,  block  19...       8,641.69    118,392.22 
All  the  above  is  located  in  the  city  of  South 
Chicago,  Illinois. 


APPENDIX.  237 

Manufacturing  Plant : 

Machinery,  factory  boilers  and 
engines,  power  plant,  etc.,  lo- 
cated on  above  real  estate 116,560.53 

Trade  Marks: 

Trade  mark  and  copyrights  on 

brands,  etc 48,000.00 

Current  and  Working  Assets : 

Inventories   107,461.23 

Accounts  and  bills  re- 
ceivable         92,757.35 

Cash  and  sight  ex- 
change on  hand  and 
in  bank   10,514.71    210,733.29 


$493,686.04 

Liabilities  : 

Notes  payable  $151,200.00 

Accounts  payable  . . .     17,542.54  $168,742.54 

Profit  and  Loss 43.50 

Capital  Stock: 
Common    stock    2,000 

shares  issued $200,000.00 

Preferred    stock    500 

shares  issued 50,000.00    250,000.00 

Surplus   75,100.00 

$493,686.04 


238  APPENDIX. 

The  real  estate  shown  on  statement  is  located  in 
the  heart  of  the  city  of  South  Chicago  and  is  free 
of  all  incumbrances.  Values  placed  upon  buildings 
and  machinery  based  on  the  depreciated  values  of 

Appraisal  Company,  made  in  1909, 

with  additions  and  depreciations  taken  into  ac- 
count since  that  time.  Eeal  estate  value  of  Lots 
7,  8  and  9,  basis  of  appraisal;  Lot  10  and  one- 
half  of  Lot  11,  basis  actual  cost.  Trade  marks, 
we  think,  are  placed  at  a  very  conservative  value, 
as  the  star  mark  alone  could  be  readily  sold  for 
$50,000. 

No  consideration  whatever  was  paid  for  the 
good  will  of  either  company  when  the  merger  was 
completed. 

The  company  has  decided  to  sell  privately  and 
at  par  the  $100,000  of  preferred  stock  unissued, 
the  proceeds  to  be  used  for  working  capital.  This 
will  give  an  ample  working  capital,  with  a  material 
reduction  in  the  amount  of  current  liabilities. 

Prefeebed  Stock  Provisions. 

**The  preferred  stock  shall  be  entitled  out  of 
any  and  all  surplus  net  profits,  whenever  ascer- 
tained, to  cumulative  dividends  at  the  rate  of  seven 
per  centum  (7%)  per  annum  in  each  and  every 
year  in  preference  and  priority  to  any  payment  of 
any  dividends  on  the  common  stock  for  each  year. 


APPENDIX.  239 

**If,  after  providing  for  the  payment  of  full 
dividends  for  any  year  on  the  preferred  stock, 
and  for  any  balance  that  may  remain  due  on  the 
cumulative  dividends  on  such  preferred  stock  for 
preceding  years,  there  shall  remain  any  surplus 
net  profits,  the  board  of  directors  may  declare,  and 
out  of  such  surplus  net  profits  may  pay  annual 
dividends  upon  the  common  stock  of  the  said  cor- 
poration to  the  extent  of  but  not  exceeding  seven 
per  centum  (7%)  upon  such  common  stock,  but  no 
such  dividends  shall  be  declared  or  paid  until  the 
cumulative  dividends  shall  have  been  paid  in  full 
upon  the  preferred  stock  for  such  year,  and  for 
all  preceding  years ;  and  after  the  payment  of  such 
cumulative  dividends  upon  the  preferred  stock 
and  the  dividends  upon  the  common  stock,  the 
remainder  of  any  surplus  net  profits  shall  be 
applicable  to  the  payment  of  further  dividends 
equally  per  share  upon  both  preferred  and  com- 
mon stock. 

**In  case  of  the  dissolution  or  termination 
(whether  voluntary  or  involuntary)  of  the  cor- 
poration, the  preferred  stock  and  the  holders 
thereof  shall  also  be  entitled  to  preference  in  the 
distribution  of  the  assets  and  property  of  the  cor- 
poration, and  any  and  all  such  assets  and  prop- 
erty in  case  of  such  dissolution  shall  be  applied 
first  to  the  payment  in  full  of  the  principal  of 
the  said  preferred  capital  stock  at  par  with  all 


240  APPENDIX. 

cumulative  dividends  thereon  in  preference  and 
priority  to  any  payment  upon  the  common  stock; 
and,  after  the  payment  to  the  holders  of  the  pre- 
ferred stock  at  its  par  value,  and  the  unpaid 
accrued  dividends  thereon,  the  remaining  assets 
and  funds  shall  be  divided  and  paid  to  the  holders 
of  the  common  stock  according  to  their  respective 
shares. 

**The  common  stock  only  may  be  increased  as 
provided  by  law. ' ' 

In  the  organization  of  The  American  Manufac- 
turing Company  and  in  taking  over  the  assets  of 
the  two  companies  named,  no  *^ promotion  stock'' 
was  issued  and  no  ** inflated  values"  were  placed 
upon  the  assets.  On  the  contrary,  less  than  book 
values  was  paid  for  many  of  the  working  assets, 
and  no  valuation  placed  upon  the  good  will  of 
either  company. 

The  increased  net  earnings  in  the  last  three 
years  represent  the  accumulated  benefits  derived 
from  increased  volume  of  business  and  natural 
growth,  together  with  the  cumulative  effect  of 
high  quality  of  products,  continuous,  judicious 
advertising — the  cost  of  which  was  paid  each  year 
out  of  the  earnings  of  that  year. 

The  American  Manufacturing  Company  gets  the 
benefit  of  this  increased  volume  and  growth,  with 
only  a  nominal  charge  for  trade  marks. 

The  common  stock  held  in  the  treasury  will 


APPENDIX.  241 

probably  not  be  issued  until  needed  for  improve- 
ments or  increase  in  plant,  or  in  purchasing 
further  manufacturing  facilities. 

No  change  of  management  is  contemplated;  no 
cash  will  be  withdrawn  from  the  company,  and 
there  will  be  no  change  in  ownership,  except  the 
change  caused  by  new  purchasers  of  preferred 
stock  now  offered  for  sale. 

All  orders  for  stock  will  be  received  subject 
to  prior  sale. 

Eespectfully  submitted, 
The  American  Manufacturing  Company. 


Form  op  Appraisal  of  Property,  to  be  Accepted 
BY  A  Corporation  in  Payment  for  Stock. 

Chicago,  Illinois,  May  12th,  1907. 

We,  the  undersigned  commissioners,*  (hereto- 
fore, on  the  29th  day  of  April,  1907,  appointed  by 
the  Secretary  of  State  of  Illinois),  having  care- 
fully examined,  investigated  and  valued  the  plant, 
machinery,  assets  and  good  will  of  the  business, 
heretofore  owned  and  controlled  by  The  Doe  Elec- 
trical Mfg.  Co.,  of  333  Plymouth  Avenue,  in  the 
City  of  Chicago,  do  appraise  said  assets  of  said 
business  as  follows : 

Machinery,  tools,  lathes,  presses,  etc., 
etc.,  as  per  inventory  attached  here- 
to, marked  Exhibit  *^A'' $  64,900.00 

Stock  of  finished  and  unfinished  prod- 
uct and  merchandise,  as  per  in- 
ventory attached  hereto,  marked  Ex- 
hibit *^B''  25,400.00 

GiBfice  outfit  and  fixtures  as  per  inven- 
tory attached  hereto,  marked  Ex- 
hibit ''C'  1,200.00 

*  By  here  substituting  the  word  Directors,  in  place  of  the  word 
Commissioners  the  form  maj  also  be  utilized  by  them. 

242 


APPENDIX.  243 

Good  will  and  intangible  rights  as  per 
assignments  and  conveyances  here- 
to attached,  marked  Exhibits  ''D,'' 
**E''  and  ''F''  8,500.00 


Total  appraised  value $100,000.00 

Respectfully  submitted, 
William  Johnson,  ] 

Henry  Smith,  .  Commissioners 

Henry  Jones.  (^^  ^^^^^  ^^  Directors). 


Resolution  Ratifying  Commissioners'  Acts  in 
Appraising  and  Accepting  Assets  to  be  Turned 
in  to  a  Corporation,  in  Exchange  for  Stock, 
UPON  a  Reorganization. 

Whereas,  This  company  was  organized  for  the 
purpose  of  engaging  in  the  manufacture  and  sale 
of  electrical  appliances  and  supplies,  and  particu- 
larly to  acquire,  own  and  operate  the  business 
heretofore  owned  and  conducted  by  The  Doe 
Electrical  Mfg.  Co.,  at  333  Plymouth  Avenue,  in 
the  City  of  Chicago,  and 

Whereas,  It  appearing  to  the  Board  of  Direc- 
tors of  this  company  that  the  commissioners, 
heretofore  on  to-wit:  the  9th  day  of  May,  1907, 
appointed  by  the  Secretary  of  State  of  Illinois  to 
open  books  of  subscription  to  the  capital  stock  of 
this  company,  did  in  accordance  with  their 
authority  and  duty  in  the  premises  on  to-wit :  the 
21st  day  of  May,  1907,  appraise  and  take  over,  as 
such  commissioners  and  trustees  for  this  company, 
the  plant,  business  and  assets  of  The  Doe  Elec- 
trical Mfg.  Co.,  and  are  now  holding  the  same  as 
such  commissioners  and  trustees  subject  to  the 
action  of  this  Board ;  and. 

Whereas,  It  further  appears,  from  the  minutes 
244 


APPENDIX.  245 

and  proceedings  of  said  commissioners,  recorded 
in  the  minute  book  of  this  company,  that  said 
plant  and  assets  were  duly  appraised  and  valued 
at  the  sum  of  One  Hundred  Thousand  ($100,000) 
Dollars,  and  that  the  said  appraisal  and  valua- 
tion were  carefully  and  properly  made,  and  the 
valuation  placed  thereon  is,  in  the  judgment  of 
this  Board,  fair  and  reasonable;  and, 

Whereas,  Said  property  and  assets  have  been 
re-appraised  by  this  Board,  and  valued  at  said 
sum  of  One  Hundred  Thousand  ($100,000)  Dol- 
lars, and  it  is  the  concensus  of  opinion  of  this 
Board  that  the  acquiring  of  said  property  is  essen- 
tial to  the  best  interests  of  this  company,  in  order 
that  it  may  become  immediately  a  going  and  pay- 
ing concern. 

Therefore,  he  it  Resolved,  That  this  company 
do  purchase  of  the  said.  The  Doe  Electrical  Mfg. 
Co.,  through  said  commissioners,*  the  said  goods, 
chattels  and  property  mentioned  and  set  forth  in 
the  minutes  and  proceedings  of  the  said  commis- 
sioners herein  recorded,  and  set  forth  in  the  bill 
of  sale  accompanying  said  transfer  to  them,  from 
said.  The  Doe  Electrical  Mfg.  Co.,  and  that  the 
action  of  said  commissioners  in  the  premises  be 
and  the  same  is  in  all  respects,  hereby  ratified, 
confirmed  and  adopted;  and  that  the  President 

*  Or  Incorporators. 


246  APPENDIX. 

and  Secretary  of  this  company  be,  and  they  are 
hereby  authorized,  empowered  and  directed  to 
issue  on  behalf  of  this  company,  ten  thousand 
(10,000)  shares  of  its  capital  stock  at  par,  to  the 
several  stockholders  of  The  Doe  Electrical  Mfg. 
Co.,  as  their  rights  appear  by  the  terms  of  said 
sale,  and  in  accordance  with  the  resolution  of  the 
Board  of  Directors  of  said.  The  Doe  Electrical 
Mfg.  Co.,  conveying  said  property  to  said  com- 
missioners, in  payment  for  said  goods,  chattels, 
and  property,  and  the  Treasurer  of  this  company 
is  also  hereby  authorized  and  directed  to  credit 
the  said  sum  of  One  Hundred  Thousand  ($100,- 
000)  Dollars  upon  the  subscription  of  William 
Smith  to  the  capital  stock  of  this  company  hereto- 
fore made  by  him. 


Receipt  to  be  Issued  by  the  Commissioners  in 
Illinois  (or  by  a  Trustee  in  Any  State)  for 
Payment  on  Account  of  Stock  Subscription, 
IN  Advance  of  Complete  Organization. 


No. 


Shares 


Name 


No No.  of  shares .... 

The  John  Doe  Electric  Co., 
Chicago. 
$ 

This  certifies,  that 

••• of-- , 

being  an  original  subscriber  for 

shares  of  the  capital  stock 

of  The  John  Doe  Electric  Co. 
(a  corporation  in  process  of  or- 
ganization under  the  laws  of  the 
State  of  Illinois),  at  its  par  value 
of  $10.00  per  share,  has  paid  to 
us,  as  commissioners,  duly  ap- 
pointed by  the  Secretary  of  State 
of  Illinois  (and  also  trustees), 
for  said  corporation,  the  sum  of 

dollars,  to  apply  on 

account  of  said  subscription,  in 
accordance   with   its   terms,   the 

same  being %  of  the  total 

amount  thereof. 

This  receipt  is  issued  on  be- 
247 


248 
Amount, 

$ 


Installment, 


Date, 


190. 


APPENDIX. 

half  of  said  The  John  Doe  Elec- 
tric Co.,  and  upon  the  condition 
that  as  soon  as  the  said  corpora- 
tion is  fully  organized,  that  said 
payment  hereby  acknowledged 
will  be  credited  on  the  said  sub- 
scription, and  that  upon  the  sur- 
render of  this  receipt  by  the 
owner  thereof,  and  the  payment 
of  the  balance  due  upon  said  sub- 
scription, according  to  its  terms, 
a  regular  and  duly  executed  stock 
certificate  of  said  corporation  will 
be  issued  to  the  said  subscriber 
or  his  assignee. 
Dated   at   Chicago,   Ills.,   this 

....  day  of A.  D., 

190... 

Commissioners 
(or  Trustees). 


Assignment  of  the  Foregoing  Commissioners* 
Receipt  and  the  Subscription  Under  Which 
THE  Same  is  Issued. 

For  Value  Received hereby  sell, 

assign  and  transfer  unto  

all  my  rights,  title  and 

interest  in  and  to  the  subscription  heretofore  made 

by  me  to shares  of  the  capital  stock  of 

The  John  Doe  Electric  Co.,  together  with  the 
payment  made  thereon,  as  evidenced  by  the  within 
Commissioners'  receipt. 

This  assignment  and  transfer  is  made  upon  and 
in  accordance  with  the  terms  and  conditions  of 
my  said  subscription,  and  I  do  hereby  authorize 
and  instruct  the  duly  authorized  officers  of  said 
corporation  to  issue  the  stock  subscribed  for  by 

me,  to  the  order  of  my  said  assignee  upon 

compliance  with  all  the  conditions  of  my 

said  subscription  and  the  due  surrender  of  this 
certificate. 

Dated  at  this  day  of 

A.  D.  190... 

[Seal.] 

Witness, 

249 


Installment  Certificate,  for  Use  of  a  Corpora- 
tion When  Selling  Stock  to  be  Paid  For  in 
Installments. 


No. 


Shares 


Name, 


No Shares 

The  John  Doe  Electric  Co., 
Chicago. 
$ 


This  certifies  that 

,  a  subscriber  for 

Shares  of  the  Capital  Stock  of 
The  John  Doe  Electric  Co.,  at 
its  par  value  of  $10.00  per  share, 
has  this  day  paid  into  the  treas- 
ury of  said  corporation  to  be  ap- 
plied on  account  of  said  subscrip- 
tion, the  sum  of  $ ,  same 

being  an  installment  of  $ 

per  share. 

It  is  mutually  agreed  between 
the  holder  hereof,  and  The  John 
Doe  Electric  Co.,  that  the  issu- 
ance of  said  shares  of  stock  is 
subject  to  the  conditions  of  the 
said  subscription,  and  that  the 
regular  stock  certificates  of  said 
corporation  are  not  to  be  issued 
250 


APPENDIX. 


251 


Rec'd  on 
Acc^t 

$ 


Date, 


thereunder,  until  the  first  day  of 
June,  A.  D.,  1908 ;  and  that  upon 
the  payment  of  the  remaining  in- 
stallments of  said  subscription  in 
accordance  with  its  terms,  and 
the  due  surrender  of  this  certifi- 
cate, such  regular  stock  certifi- 
cate will,  upon  said  first  day  of 
June,  1908,  be  duly  issued  to  the 
said  subscriber  or  his  assignee. 
Dated  at  Chicago,  111.,  this  .... 


day  of 


1907. 


Treasurer. 


[Corporate  Seal.] 
Attest : 


Secretary. 


Assignment  op  the  Foregoing  Installment  Cer- 
tificate, AND  the  Subscription  Under  Which 
THE  Same  is  Issued. 

For  Value  Received hereby  sell,  assign 

and  transfer  unto all  my  rights, 

title  and  interest  in  and  to  the  subscription  here- 
tofore made  by  me  to shares  of  the 

capital  stock  of  The  John  Doe  Electric  Co., 
together  with  the  payment  made  thereon,  as  evi- 
denced by  the  within  installment  certificate. 

This  assignment  and  transfer  is  made  upon,  and 
in  accordance  with,  the  terms  and  conditions  of 
my  said  subscription,  and  is  subject  to  the  condi- 
tions thereof;  and  I  do  hereby  authorize  and 
instruct  the  duly  authorized  officers  of  said  cor- 
poration to  issue  the  stock  subscribed  for  by  me, 
to  the  order  of  my  said  assignee  on  the  first  day 

of  June,  A.  D.  1908,  upon compliance 

with  all  the  conditions  of  my  said  subscription  and 
the  due  surrender  of  this  certificate. 

Dated  at this day  of A.  D. 

190... 

[Seal.] 

Witness  

252 


BY-LAWS 

OF 

THE  JOHN  DOE  ELECTEIC  CO. 

Aeticle  I. 

BOARD  OF  DIRECTORS. 

Sec.  1.  The  Board  of  Directors  of  this  Com- 
pany shall  consist  of  five  (5)  stockholders,  who 
shall  hold  their  respective  offices  for  one  (1)  year, 
and  until  their  successors  are  elected. 

Article  II. 

OFFICERS. 

Sec.  1.  The  officers  of  this  company  shall  con- 
sist of  a  President,  a  Vice  President,  a  Secretary 
and  a  Treasurer,  and  such  other  officers  and 
agents  as  shall,  from  time  to  time,  be  deemed 
necessary  by  the  Board  of  Directors. 

Sec.  2.  Such  officers  shall  hold  their  respective 
offices  for  the  period  of  one  (1)  year  following 
their  election,  and  until  their  successors  are 
elected,  and  with  salary,  if  any,  as  shall  be  pro- 
vided by  the  directors. 

253 


254  APPENDIX. 

Sec.  3.  Any  officer  may  be  removed  by  tlie 
Board  of  Directors,  when,  in  their  judgment,  the 
interests  of  the  company  so  requires. 

Article  III. 


Sec.  1.  The  annual  meeting  of  the  Stockholders 
of  this  company  shall  be  held  at  its  principal 
office  in  Chicago  on  the  second  Tuesday  of  May 
of  each  year  at  the  hour  of  three  o  'clock  p.  m. 

Sec.  2.  A  notice  of  such  meeting,  giving  the 
day  and  the  hour  thereof,  shall  be  signed  by  the 
secretary,  and  mailed  to  each  stockholder  of 
record  as  the  stockholder's  address  appears  on 
the  books  of  the  company,  or  so  far  as  the  same 
are  known  to  the  secretary,  at  least  ten  (10)  days 
before  said  meeting  day. 

Sec.  3.  Any  business  may  be  transacted  at  such 
annual  meeting  without  specifying  the  same  in  the 
notice  therefor. 

Sec.  4.  The  president,  or  any  two  (2)  members 
of  the  Board  of  Directors,  may  call  special  meet- 
ings of  the  stockholders  of  this  company,  which 
shall  be  held  at  the  general  office  of  the  company 
in  Chicago,  or  at  such  other  place  in  the  City  of 
Chicago,  and  at  such  hours,  as  the  president  or 
such  directors  may  determine ;  and  a  notice,  briefly 


APPENDIX.  255 

stating  the  subjects  which  will  come  before  such 
special  meeting,  shall  be  mailed  to  each  stock- 
holder at  his  last  known  address,  at  least  five  (5) 
days  before  the  time  for  holding  said  meetings. 

Article  IV. 

MEETINGS  OF  BOARD   OF  DIRECTORS. 

Sec.  1.  The  regular  annual  meeting  of  the 
Board  of  Directors  of  this  company  shall  be  held 
on  the  second  Tuesday  of  May,  at  the  ofiice  of  the 
company  in  Chicago,  immediately  after  the  annual 
stockholders'  meeting. 

Sec.  2.  Three  (3)  of  the  Board  of  Directors 
shall  constitute  a  quorum  for  the  transaction  of 
any  business  at  any  meeting. 

Sec.  3.  The  president  of  this  company  may 
call  special  meetings  of  the  Board  of  Directors 
whenever  he  may  deem  it  necessary  so  to  do. 

Sec.  4.  The  secretary  shall,  upon  the  request 
of  the  president,  mail  postpaid  to  the  address  of 
each  director,  so  far  as  the  same  appears  on  the 
company's  books,  a  notice  of  all  special  directors' 
meetings  and  shall  specify  briefly  therein,  the  sub- 
jects that  will  come  before  the  meeting,  at  least 
five  (5)  days  before  such  meeting  day. 

Sec.  5.  No  business  shall  be  transacted  at  any 
special  directors'  meeting,  except  that  specified 
in  the  notice  or  call  therefor. 


256  APPENDIX. 

Article  V. 

ORDER  OF  BUSINESS  AT  ALL  MEETINGS. 

Sec.  1.  The  order  of  business  at  all  meetings 
of  the  Board  of  Directors  and  Stockholders,  shall 
be  as  follows: 

First— Eoll  call. 

Second — Reading  minutes  of  last  meeting. 

Third — Considering  communications  to  the 
Board  or  Stockholders. 

Fourth — Reports  of  officers  to  the  Board  or 
Stockholders. 

Fifth — Unfinished  business. 

Sixth — Original  resolutions  and  new  business. 

Article  VI. 

THE   president. 

Sec.  1.  The  president  shall  preside  over  all 
meetings  of  the  Board  of  Directors  and  Stock- 
holders, at  which  he  may  be  present. 

Sec.  2.  In  the  absence  of  the  president  at  any 
directors'  meetings,  the  vice  president  shall  be 
the  acting  president  for  such  meetings. 

Sec.  3.  In  case  the  office  of  treasurer  and  that 
of  president  of  this  company  shall  be  filled  by 
different  persons,  then  all  notes  and  bonds,  or 
other  evidences  of  indebtedness,  shall  be  counter- 
signed by  the  president. 


APPENDIX.  257 

Article  VII. 

VICE   PRESIDENT. 

Sec.  1.  The  vice  president  of  the  company 
shall  take  an  active  part  in  the  conduct  of  the 
business,  and  his  duties  and  responsibilities  shall 
be  determined  from  time  to  time,  by  the  Board 
of  Directors. 

Sec.  2.  In  the  absence  of  the  president  at  any 
directors'  meeting,  or  in  his  absence  from  the 
city  for  any  protracted  period,  the  vice  president 
shall  be  the  acting  president. 

Article  VIII. 

THE  SECRETARY. 

Sec.  1.  The  secretary  of  the  company  shall 
attend  all  meetings  of  the  stockholders  and  direc- 
tors when  practicable;  in  his  absence  a  secretary 
pro  tem,  or  acting  secretary  shall  be  appointed. 

Sec.  2.  The  secretary  shall  keep  a  correct 
record  of  the  proceedings  of  the  Board  of  Direc- 
tors and  of  the  stockholders  in  the  corporate 
record  book  of  the  company,  and  he  shall  perform 
such  other  duties,  from  time  to  time,  as  the  Board 
of  Directors  may  by  resolution  designate. 

Sec.  3.  The  secretary  shall  countersign  all 
checks  drawn  upon  the  funds  of  this  company  and 


258  APPENDIX. 

attest  such  other  formal  instruments  as  require 
the  same. 

Aeticle  IX. 

THE   TKEASUKEB. 

Sec.  1.  The  treasurer  shall  keep  the  moneys  of 
the  company  in  such  bank,  or  banks,  as  may  be 
designated  by  the  Board  of  Directors ;  the  deposit 
account  shall  be  kept  in  the  name  of  the  cor- 
poration. 

Sec.  2.  He  shall  sign  all  checks,  drafts,  notes, 
or  other  evidences  of  indebtedness,  for  and  on 
behalf  of  the  company,  and  have  full  charge  of 
its  financial  affairs,  subject,  however,  to  the  direc- 
tion of  the  Board  of  Directors. 

Sec.  3.  All  checks  drawn  by  the  treasurer  shall 
be  countersigned  by  the  secretary  before  they  are 
issued. 

Sec.  4.  The  treasurer  shall  take  an  active  part 
in  the  conduct  of  the  business,  and  his  duties  and 
responsibilities  shall  be  determined,  from  time 
to  time,  by  the  Board  of  Directors. 

Article  X. 

ANNUAL  EEPORTS. 

Sec.  1.  It  shall  be  the  duty  of  all  officers  of 
the  corporation  to  make  full  and  complete  written 


APPENDIX.  259 

reports  to  the  Board  of  Directors  annually,  on 
the  second  Tuesday  of  May  in  each  year,  of  all 
matters  pertaining  to  their  respective  offices,  and 
the  board  may  require  any  officer  of  the  corpora- 
tion, at  any  time,  to  make  such  reports,  touching 
the  business  of  his  office,  as  they  shall  deem 
necessary. 


Article  XI. 

CHECKS,   DRAFTS,   MORTGAGES   AND   BONDS. 

Sec.  1.  All  checks  and  drafts  shall  be  executed 
in  the  company  ^s  name  by  the  treasurer,  and 
countersigned  by  the  secretary. 

Sec.  2.  In  case  the  office  of  treasurer  and  that 
of  president  of  this  company  shall  be  filled  by 
different  persons,  then  all  notes,  bonds  or  other 
evidences  of  indebtedness,  shall  be  countersigned 
by  the  president,  before  they  are  issued. 

Sec.  3.  In  case  of  the  issuing  of  any  mortgages 
or  bonds  on  the  plant  or  property  of  the  company, 
it  shall  be  necessary  to  the  validity  thereof  that 
authority  be  first  obtained  from  the  stockholders. 

Sec.  4.  All  promissory  notes,  mortgages  and 
bonds  issued  by  the  company  shall  be  executed 
by  the  president,  countersigned  by  the  treasurer, 
and  attested  by  the  secretary. 


260  appendix. 

Abticle  XII. 
certificates  of  stock. 

Sec.  1.  All  certificates  of  stock  shall  be  signed 
by  the  president  and  secretary,  and  attested  by 
the  seal  of  the  company. 

Sec.  2.  Capital  stock  shall  be  transferable  on 
the  books  of  the  corporation,  only  upon  return  and 
delivery  of  the  certificate  so  transferred,  duly 
endorsed;  the  secretary  shall  cancel  the  same 
and  issue  a  new  certificate  or  certificates  to  the 
assignee. 

Sec.  3.  No  person  shall  be  entitled  to  vote  at 
any  meeting  of  the  stockholders,  unless  his  owner- 
ship of  stock  shall  appear  on  the  books  of  the 
company  on  the  first  day  of  the  month  preceding 
the  time  of  such  meeting,  except  in  case  of  execu- 
tors or  administrators. 

Sec.  4.  Any  stockholder  may  vote  by  proxy, 
duly  authorized  in  writing  and  presented  and 
filed  with  the  secretary. 

Sec.  5.  In  case  of  loss  or  destruction  of  stock 
certificates  by  the  owners  thereof,  new  certificates 
may  be  issued  in  lieu  thereof  only  upon  such  terms 
and  conditions  as  the  Board  of  Directors  may  im- 
pose. 


APPENDIX.  261 

Abticle  xm. 

SALARIES. 

Sec.  1.  No  salaries  of  any  kind  shall  be  paid 
to  or  claimed  by  any  officer  of  this  company,  (as 
such)  unless  the  amount  of  such  salary  is  fixed 
and  provided  for  by  order  or  resolution  of  the 
Board  of  Directors,  adopted  prior  to  the  per- 
formance of  the  services  in  question  and  recorded 
in  the  minute  book  of  the  company. 

Article  XIV. 

VACANCIES. 

Sec.  1.  Vacancies  in  any  of  the  offices  may  be 
filled  by  the  directors  of  this  Company  for  the 
unexpired  term,  at  any  regular  or  special  meet- 
ing of  the  Board. 

Sec.  2.  In  the  absence  or  disability  of  any 
officer  or  agent,  the  directors  may,  if  they  see  fit, 
appoint  in  his  stead  an  acting  officer  or  agent  who 
shall  perform  the  duties  of  his  office,  during  such 
absence  or  disability,  under  the  directions  of,  and 
to  be  governed  by  the  Board  of  Directors. 

Sec.  3.  Whenever  a  vacancy  occurs  in  the 
Board  of  Directors  of  the  Company,  the  same 
shall  be  filled  by  the  stockholders  at  any  regular 
or  special  meeting  thereof. 


262  APPENDIX. 

Akticle  XV. 

ADDKESSES. 

Sec.  1.  It  shall  be  the  duty  of  each  stockholder, 
officer  and  director  to  inform  the  secretary  of  his 
postoffice  address,  and  of  any  change  in  the  same ; 
and  it  shall  be  the  duty  of  the  secretary  to  keep 
a  book  of  such  addresses. 

Sec.  2.  Notices,  mailed  post  paid,  to  the  ad- 
dresses so  given  shall  be  deemed  sufficient  notice 
for  any  and  all  purposes. 

Akticle  XVI. 

DIVIDENDS. 

Sec.  1.  Dividends  may  be  declared  from  the 
net  profits  of  the  company,  at  such  times,  and  in 
such  amounts,  as  the  Board  of  Directors  shall, 
from  time  to  time,  deem  proper. 

Article  XVII. 

CORPORATE  SEAL. 

Sec.  1.  It  shall  be  the  duty  of  the  Board  of 
Directors,  at  their  first  meeting,  to  adopt  a  cor- 
porate seal  for  the  corporation;  and  to  affix  an 
impression  of  the  same  upon  the  record  book  of 
the  corporation  opposite  this  article. 


appendix.  263 

Article  XVIII. 

amendments. 

Sec.  1.  These  by-laws,  or  any  of  them,  may  be 
altered,  amended,  or  repealed  at  any  regular  or 
special  meeting  of  the  Board  of  Directors,  and 
at  such  meetings  new  by-laws  may  be  added ;  pro- 
vided thirty  (30)  days  written  or  printed  notice 
shall  be  given  to  all  stockholders  of  any  such 
intended  alteration,  amendment  or  repeal. 
Adopted,  this  16th  day  of  May,  1907. 

John  Dob, 
EiCHARD  Roe, 
William   Smith, 
Henry  Brown, 
James  Johnson, 
Attest: 

Henry  Jones, 
Secretary. 


Form  of  Assignment  of  Invention  Before 
Patent. 

(From  ^'Eules  of  Practice/'  U.  S.  Patent  Office.) 

Whereas,  I,  John  Jones,  of  Chicago,  in  the 
County  of  Cook,  and  State  of  Illinois,  have  in- 
vented a  certain  new  and  useful  improvement  in 
electric  engines,  for  which  I  am  about  to  make 

(or  have  heretofore  on  the  ....  day  of 

A.  D.  190. .  made)  application  for  Letters  Patent 
of  the  United  States ;  * 

And  Whereas,  William  Smith  of  Chicago, 
County  of  Cook,  State  of  Illinois,  is  desirous  of 
acquiring  an  interest  in  the  said  invention  and 
in  the  Letters  Patent  to  be  obtained  therefor ; 

Now,  Therefore,  To  all  whom  it  may  concern, 
be  it  known  that,  for  and  in  consideration  of  Five 
Thousand  Dollars,  to  me  in  hand  paid,  the  receipt 
of  which  is  hereby  acknowledged,  I,  the  said  John 
Jones,  have  sold,  assigned  and  transferred,  and 
by  these  presents  do  sell,  assign  and  transfer  unto 
the  said  William  Smith  the  full  and  exclusive 
right  to  the  said  invention,  as  fully  set  forth  and 

*  If  application  for  Letters  Patent  have  been  made,  give  num- 
ber of  application,  as  well  as  date. 

264 


APPENDIX.  265 

described  in  the  specification  prepared  and  exe- 
cuted by  me  on  the  5th  day  of  March,  1907,  pre- 
paratory to  obtaining  Letters  Patent  of  the 
United  States  therefor ;  and  I  do  hereby  authorize 
and  request  the  Commissioner  of  Patents  to  issue 
the  said  Letters  Patent  to  the  said  William  Smith, 
as  the  assignee  of  my  entire  right,  title  and 
interest  in  and  to  the  same,  for  the  sole  use  and 
behoof  of  the  said  William  Smith  and  his  legal 
representatives. 

In  Testimony  Whereof,  I  have  hereunto  set 
my  hand,  and  affixed  my  seal,  this  25th  day  of 
June,  1907. 

John  Jones.    [Seal.] 
In  the  presence  of 

Harry  Williams. 


Form  of  Assignment  of  Undivided  Interest  in 
Letters  Patent. 

(From  ^^Rules  of  Practice,'^  U.  S.  Patent  Office.) 
Whereas,  I,  John  Jones,  of  Chicago,  County  of 
Cook,  and  State  of  Illinois,  did  obtain  Letters 
Patent  of  the  United  States,  for  an  improvement 
in  electric  engines,  which  Letters  Patent  are  num- 
bered *  *  *  and  bear  date  the  30th  day  of 
June,  in  the  year  1907;  and  whereas  William 
Smith,  of  Chicago,  County  of  Cook,  and  State  of 
Illinois,  is  desirous  of  acquiring  an  interest  in 
the  same: 

Now,  Therefore,  To  all  whom  it  may  concern, 
be  it  known  that,  for  and  in  consideration  of  the 
sum  of  One  Thousand  ($1,000)  Dollars,  to  me  in 
hand  paid,  the  receipt  of  which  is  hereby  acknowl- 
edged, I,  the  said  John  Jones,  have  sold,  assigned 
and  transferred,  and  by  these  presents  do  sell, 
assign  and  transfer  unto  the  said  William  Smith 
the  undivided  one-half  part  of  the  whole  right, 
title,  and  interest  in  and  to  the  said  invention,  and 
in  and  to  the  Letters  Patent  therefor  aforesaid; 
the  said  undivided  one-half  part  to  be  held  and 
enjoyed  by  the  said  William  Smith  for  his  own 
use  and  behoof,  and  for  the  use  and  behoof  of  his 

266 


APPENDIX.  267 

legal  representatives,  to  the  full  end  of  the  term 
for  which  said  Letters  Patent  are  or  may  be 
granted,  as  fully  and  entirely  as  the  same  would 
have  been  held  and  enjoyed  by  me  had  this  assign- 
ment and  sale  not  been  made. 

In  Testimony  Whereof,  I  have  hereunto  set 
my  hand,  and  affixed  my  seal,  at  Chicago,  in  the 
County  of  Cook,  and  State  of  Illinois,  this  6th  day 
of  July,  A.  D.  1907. 

John  Jones.     [Seal.] 
In  presence  of 

Harry  Williams. 


FoKM  OF  Assignment  of  Entibe  Intebest  in 
Patent. 

(From  ''Rules  of  Practice,'^  U.  S.  Patent  Office.) 

Wheeeas,  John  Jones,  of  Chicago,  in  the  County 
of  Cook,  and  State  of  Illinois,  did  obtain  Letters 
Patent,  of  the  United  States,  for  an  improvement 
in  electric  engines,  which  Letters  Patent  are  num- 
bered *  *  *  and  bear  date  the  30th  day  of 
June,  in  the  year  1907; 

And,  Whekeas,  I  am  now  the  sole  owner  of  said 
patent,  and  of  all  rights  under  the  same;  and, 
whereas.  The  John  Doe  Electric  Co.  (a  corpora- 
tion of  Illinois),  of  Chicago,  County  of  Cook,  State 
of  Illinois,  is  desirous  of  acquiring  the  entire 
interest  in  the  same : 

Now,  Therefore,  To  all  whom  it  may  concern, 
be  it  known  that,  for  and  in  consideration  of  the 
sum  of  ten  thousand  dollars,  to  me  in  hand  paid, 
the  receipt  of  which  is  hereby  acknowledged,  I, 
the  said  John  Jones,  have  sold,  assigned  and 
transferred,  and  by  these  presents,  do  sell,  assign 
and  transfer,  unto  the  said.  The  John  Doe  Elec- 
tric Co.,  the  whole  right,  title  and  interest  in  and 
to  the  said  improvements  in  Electric  Engines  and 

268 


APPENDIX.  269 

in  and  to  the  Letters  Patent  therefor  aforesaid: 
The  same  to  be  held  and  enjoyed  by  the  said 
The  John  Doe  Electric  Co.,  for  its  own  use  and 
behoof,  and  for  the  use  and  behoof  of  its  legal 
representatives,  to  the  full  end  of  the  term  for 
which  said  Letters  Patent  are  or  may  be  granted, 
as  fully  and  entirely  as  the  same  would  haVe  been 
held  and  enjoyed  by  me  had  this  assignment  and 
sale  not  been  made. 

In  Testimony  Whereof,  I  have  hereunto  set  my 
hand  and  affixed  my  seal,  at  Chicago,  in  the  County 
of  Cook,  and  State  of  Illinois,  this  18th  day  of 
May,  A.  D.  1907. 

John  Jones.     [Seal.] 
Signed,  sealed  and  delivered  in  presence  of 
William  Smith. 


Form  of  Coal  Option, 
With  Deferred  Payments: 

This  agreement,  Made  and  entered  into  this 

day  of ,  190 . . ,  between 

of County, , 

party  of  the  first  part,  and of 

,  party  of  the  second  part : 

WITNESSETH,  That  the  party  of  the  first  part 
in  consideration  of  one  dollar  ($1.00)  and  other 

good  and  valuable  considerations  to 

in  hand  paid  by  the  said  party  of  the  second  part, 
the  receipt  of  which  is  hereby  acknowledged,  does 
hereby  grant  and  sell  unto  said  party  of  the  second 
part,  his  heirs  or  assigns,  the  exclusive  right,  or 

option,  for  the  period  of months  from 

the  date  hereof,  to  purchase  at  the  price  and  upon 
the  terms  hereinafter  stated,  all  the  coal  and 
mineral  lying  and  being  under  the  surface  of  the 

following  described  real  estate  situate  in 

County, to-wit : 


the  said  above  described  real  estate  containing. . 

acres  of  land,  more  or  less. 

270 


APPENDIX.  271 

Said  party  of  the  second  part  hereby  agrees  that 
he  will,  within  30  days  after  like  options  are 
obtained  on  at  least  1,000  acres  of  coal  near  or 
adjacent  to  said  premises  above  described,  begin 
drilling,  and  then  cause  to  be  put  down  upon  or  in 
the  neighborhood  of  the  above  described  real 
estate,  one  or  more  drill  holes  for  the  purpose  of 
ascertaining  and  testing  the  amount  and  quality 
of  coal  that  may  be  found  in  said  vicinity;  and, 
that  as  soon  as  said  drilling  shall  be  completed, 
and  it  is  thereby  demonstrated  to  the  satisfaction 
of  the  said  party  of  the  second  part,  that  coal  of 
sufficient  thickness  and  quality  underlies  said 
above  described  premises,  then  and  in  that  event, 
said  party  of  the  second  part  hereby  agrees  to 
pay  for  said  coal  above  described  at  the  price  here- 
inafter mentioned,  in  the  following  manner, 
to-wit:  First — to  pay  to  the  party  of  the  first 
part  one  quarter  of  the  purchase  price  in  cash; 
Second — to  give  to  the  said  party  of  the  first  part 
his  promissory  note  for  one  quarter  of  the  pur- 
chase price  of  said  coal;  Third — to  give  to  the 
said  party  of  the  first  part  his  promissory  note 
for  one-half,  or  the  balance,  of  the  purchase 
money,  said  notes  to  be  payable  to  the  order  of 
said  party  of  the  first  part  on  or  before  one  and 
two  years,  respectively,  after  the  date  thereof, 
with  interest  at  the  rate  of  6%  per  annum,  and 
the  same  to  be  secured  by  a  mortgage  in  the 


272  APPENDIX. 

usual  form  upon  said  coal  and  premises  above 
described. 

And  the  party  of  the  first  part  hereby  agrees  at 

or  before  the  expiration  of months 

from  the  date  hereof,  to  convey  to  the  said  party 
of  the  second  part,  his  heirs,  legal  representatives 
or  assigns,  by  a  good  and  sufficient  wareanty  deed 
accompanied  by  a  merchantable  abstract,  brought 

down  to  date,  at  and  for  the  price  of 

dollars  per  acre,  to  be  paid  by  said  party  of  the 
second  part  in  the  manner  hereinbefore  men- 
tioned, all  the  coal  and  mineral  lying  under  said 
above  described  premises,  together  with  the  right 
to  mine,  dig  and  remove  the  same  therefrom,  and 
together  with  the  right  to  use  all  entries  under 
said  premises  for  the  purpose  of  hauling,  mining 
and  removing  coal  from  any  other  lands  near  or 
adjacent  to  the  above  described  premises. 

And  under  the  continuance  of  this  option  the 
party  of  the  first  part  hereby  grants  to  the  party 
of  the  second  part  the  right  of  ingress  and  egress 
over  said  premises  for  the  purpose  of  prospecting 
and  drilling  for  coal  on  said  premises,  and  the 
right  to  erect  such  structure  or  structures  as  are 
necessarily  incident  to  the  carrying  out  of  said 
work,  and  hereby  releases  said  party  of  the  second 
part  from  all  claims  for  damages  which  may  arise 
upon  account  of  said  drilling  and  prospecting, 
except  damage  to  growing  crops   (if  any),  for 


APPENDIX.  273 

which  said  second  party  agrees  to  pay  a  just  com- 
pensation. 

Said  party  of  the  first  part  further  agrees  to 
sell  to  said  party  of  the  second  part,  his  heirs,  or 
assigns,  at  any  time  within  one  year  after  the 
purchase  of  said  coal  as  aforesaid,  such  portion 
of  the  surface  of  said  premises  as  may  be  desired 
for  the  erection  of  tipples,  buildings,  power 
houses,  railroad  tracks  and  switches  and  other 
improvements  for  the  mining,  removal  and  trans- 
portation of  said  coal  (not  to  exceed  30  acres, 

however)  at  the  price  of dollars  per 

acre,  and  to  convey  the  title  to  said  surface  to  said 
party  of  the  second  part,  his  heirs,  legal  repre- 
sentatives or  assigns,  by  a  good  and  sufficient 
WARKANTY  DEED,  accompaniod  by  a  merchantable 
abstract  therefor. 

It  is  further  agreed  that  no  shaft  shall  be  sunk 
or  railroad  built  within  five  hundred  (500)  feet 
of  any  important  building  now  standing  upon  said 
premises  and  owned  by  the  party  of  the  first  part, 
except  by  special  contract  hereafter  secured. 

Said  first  party  further  agrees  that  if  said  party 
of  the  second  part  shall  be  drilling  and  testing 
said  premises  or  premises  adjacent  thereto  at  the 
time  of  the  expiration  of  this  option,  to  then  ex- 
tend the  time  thereof  for  a  period  of  sixty  days 
from  the  date  of  the  expiration  hereof. 


274  APPENDIX. 

In  witness  whekeof,  we  herein  bind  ourselves, 
our  heirs,  legal  representatives  and  assigns,  and 
have  affixed  our  hands  and  seals  the  day  and  year 
first  above  written. 

[Seal.] 

, [Seal.] 

[Seal.] 

[Seal.] 


:h 


State  op..-.. 

County  of. . 

I, a  Notary  Public  in  and  for 

said  county,  in  the  state  aforesaid,  do  hereby 
CERTIFY  That 

personally  known  to  me  to  be  the  same  person. . . 

whose  name subscribed  to  the  foregoing 

instrument,  appeared  before  me  this  day  in  per- 
son, and  acknowledged  that he signed, 

sealed  and  delivered  the  said  instrument  as 

free  and  voluntary  act,  for  the  uses  and  purposes 
therein  set  forth,  including  the  release  and  waiver 
of  the  right  of  homestead. 

Given  under  my  hand  and  notarial  seal,  this 

day  of A.  D.  190.... 


Notary  Public. 


appendix.  275 

Form  of  Coal  Option, 

Payments  To  Be  Made,  Either  in  Whole  or  Part, 
with  Stock  of  the  Corporation  To  Be  Formed 
for  the  Development  of  the  Field  Optioned : 
This  agreement.  Made  and  entered  into  this 

day  of 190 . . . ,  between 

of County, ,  party  of 

the  first  part,  and of , 

party  of  the  second  part: 

WITNESSETH,  That  the  party  of  the  first  part  in 
consideration  of  one  dollar  ($1.00)  and  other  good 

and  valuable  considerations  to in  hand  paid 

by  the  said  party  of  the  second  part,  the  receipt 
of  which  is  hereby  acknowledged,  does  hereby 
give,  grant,  sell  and  convey  unto  said  party  of 
the  second  part,  his  heirs,  or  assigns,  the  exclu- 
sive right,  privilege,  or  option,  for  the  period  of 

months  from  the  date  hereof,  to  purchase 

all  the  coal  and  mineral  lying  and  being  under  the 
surface  of  the  following  described  real  estate  sit- 
uate in County, ,  to-wit : 


(said  above  described  real  estate  containing. 


276  APPENDIX. 

acres  of  land,  more  or  less)  at  and  for  the  price  of 

$ per  acre,  to  be  paid  as  follows,  viz. : 

dollars  in  cash,  and  the  balance  of  said  pur- 
chase money  to  be  paid  in  Cumulative  7%  Pre- 
ferred stock  of  the  Mining  Corporation  which 
shall  be  formed  for  the  purpose  of  taking  over 
said  coal  above  described,  and  the  balance  of  the 
field  of  at  least  1,000  acres  lying  near  or  adja- 
cent to  said  coal,  and  for  the  mining  and  removal 
of  the  same.  It  being  understood  and  agreed  that 
said  corporation  above  referred  to,  shall  be  or- 
ganized under  the  laws  of and  have  a  capi- 
tal stock  of  $200,000.00,  the  same  to  be  equally 
divided  into  Cumulative  7%  Preferred  and  Com- 
mon stock,  said  preferred  stock  to  have  all  the 
rights  and  privileges  of  the  common  stock. 

Said  party  of  the  second  part  hereby  agrees, 
that  he  will,  within  30  days  after  options  are  ob- 
tained on  at  least  1,000  acres  of  coal  near  or  ad- 
jacent to  the  premises  above  described,  begin 
drilling,  and  then  cause  to  be  put  down  upon  or  in 
the  neighborhood  of  the  above  described  real  es- 
tate, one  or  more  drill  holes  for  the  purpose  of 
ascertaining  and  testing  the  amount  and  quality 
of  coal  that  may  be  found  in  said  vicinity;  and 
that  as  soon  as  said  drilling  shall  be  completed, 
and  it  is  thereby  demonstrated  to  the  satisfac- 
tion of  the  said  party  of  the  second  part,  that 
coal  of  sufficient  thickness  and  quality  underlies 


APPENDIX.  277 

said  above  described  premises,  then  and  in  that 
event,  said  party  of  the  second  part  agrees  to 
pay  for  said  coal  above  described  at  the  price  and 
in  the  manner  above  set  forth. 

And  the  party  of  the  first  part  further  agrees 

at  or  before  the  expiration  of months  from 

the  date  hereof  to  convey  unto  the  party  of  the 
second  part,  his  heirs,  legal  representatives,  or 
assigns,  by  good  and  sufficient  warranty  deed, 
accompanied  by  a  merchantable  abstract,  brought 

down  to  date,  at  and  for  the  price  of dollars 

per  acre,  to  be  paid  by  said  party  of  the  second 
part  in  the  manner  hereinbefore  mentioned,  all 
the  coal  and  mineral  lying  under  said  premises, 
together  with  the  right  to  mine,  dig  and  remove 
the  same  therefrom,  together  with  the  right  to 
use  all  entries  under  said  premises  for  the  pur- 
pose of  hauling,  mining  and  removing  coal  from 
other  lands  near  or  adjacent  to  the  above  described 
premises. 

And  under  the  continuance  of  this  option  the 
party  of  the  first  part  hereby  grants  to  the  party 
of  the  second  part,  the  right  of  ingress  and  egress 
over  said  premises  for  the  purpose  of  prospecting 
and  drilling  for  coal  on  said  premises,  and  the 
right  to  erect  such  structure  or  structures  as  are 
necessarily  incident  to  the  carrying  out  of  said 
work,  and  hereby  releases  said  party  of  the  sec- 
ond part  from  all  claims  for  damages  which  may 


278  APPENDIX. 

arise  upon  account  of  said  drillings  and  prospect- 
ing, except  damage  to  growing  crops  (if  any),  for 
which  said  second  party  agrees  to  pay  a  just  com- 
pensation. 

Said  party  of  the  first  part  further  agrees  to 
sell  to  said  party  of  the  second  part,  his  heirs,  or 
assigns,  at  any  time  within  one  year  after  the 
purchase  of  said  coal  as  aforesaid,  such  portion 
of  the  surface  of  said  premises  as  may  be  desired 
for  the  erection  of  tipples,  buildings,  power 
houses,  railroad  tracks  and  switches  and  other  im- 
provements for  the  mining,  removal  and  transpor- 
tation of  said  coal  (not  to  exceed  30  acres,  how- 
ever), at  the  price  of dollars  per  acre, 

and  to  convey  the  title  to  said  surface  to  the 
party  of  the  second  part,  his  heirs,  legal  repre- 
sentatives or  assigns,  by  a  good  and  sufficient 
WARRANTY  DEED,  accompauicd  by  a  merchantable 
abstract. 

It  is  further  agreed  that  no  shaft  shall  be  sunk 
or  railroad  built  within  five  hundred  (500)  feet 
of  any  important  building  now  standing  upon  said 
premises  and  owned  by  the  party  of  the  first  part, 
except  by  special  contract  hereafter  secured. 

Said  first  party  further  agrees  that  if  said  party 
of  the  second  part  shall  be  drilling  and  testing 
said  premises  or  premises  adjacent  thereto  at 
the  time  of  the  expiration  of  this  option,  to  then 


APPENDIX.  279 

extend  the  time  thereof  for  a  period  of  sixty  days 
from  the  date  of  the  expiration  hereof. 


In  witness  whereof,  we  herein  bind  ourselves, 
our  heirs,  legal  representatives  and  assigns,  and 
have  affixed  our  hands  and  seals  the  day  and  year 
first  above  written. 

[Seal.] 

[Seal.] 

[Seal.] 

[Seal.] 


State  of ,    j 

County  of ,    j 

I, a  Notary  Public  in  and  for 

said  county,  in  the  state  aforesaid,  do  hereby  cer- 
tify That 


personally  known  to  me  to  be  the  same  person 

whose  name subscribed  to  the  foregoing 

instrument,  appeared  before  me  this  day,  in  per- 
son, and  acknowledged  that he signed, 

sealed  and  delivered  the  said  instrument  as 

free  and  voluntary  act,  for  the  uses  and  purposes 
therein  set  forth,  including  the  release  and  waiver 
of  the  right  of  homestead. 


280  APPENDIX. 

Given  under  my  hand  and  notarial  seal,  this . . 
day  of A.  D.  190.... 


Notary  Public. 


Stockholder's  Proxy. 
Know  All  Men  By  These  Presents: 

That the  undersigned  being  the  owner  of 

record  of  Fifty  shares  of  the  capital  stock  of  The 
John  Doe  Electric  Co.,  of  Chicago,  do  hereby  make, 
constitute  and  appoint  Eichard  Roe,  of  Chicago, 
my  true  and  lawful  attorney  for  me  and  in  my 
name,  place  and  stead,  to  attend  the  annual  meet- 
ing of  the  stockholders  of  said  corporation  to  be 
held  at  333  Plymouth  Ave.,  in  the  City  of  Chicago, 
on  the  fifth  day  of  May,  A.  D.  1908,  or  at  any  ad- 
journment thereof,  and  to  represent  me,  and  for 
me  and  in  my  name  and  stead  to  vote  at  said  meet- 
ing upon  the  said  shares  of  stock  standing  in  my 
name,  upon  any  and  all  questions  that  may  be  pre- 
sented thereat,  and  in  the  transaction  of  any  other 
business  which  may  come  before  said  meeting,  or 
any  adjournment  thereof,  as  fully  as  I  could  do  if 
personally  present  at  the  doing  thereof,  and  I 
hereby  ratify  and  confirm  all  that  my  said  attor- 
ney may  do  by  virtue  hereof. 

In  Witness  Whereof,  I  have  hereunto  set  my 
hand  and  seal  this  first  day  of  May,  1908. 
^.,  William  Smith.    [Seal. J 

Henry  James. 

281 


RULES  GOVERNING  THE  LISTING  OF 
STOCKS  AND  BONDS  ON  THE  CHI- 
CAGO STOCK  EXCHANGE.* 

**An  application  to  list  securities  on  the  Chicago 
Stock  Exchange,  signed  by  an  executive  officer 
over  the  seal  of  the  corporation,  must  be  filed 
with  the  Secretary  of  the  Exchange." 

** Application  for  an  original  listing  of  securi- 
ties of  a  corporation,  must  recite:" 

1.  Title  of  the  Company; 

2.  Date  of  Organization; 

3.  Under  the  laws  of  what  state  incorporated; 

4.  Purpose  for  which  organized ; 

5.  Amount  of  authorized  Capital  Stock — 

a.  Amount  issued, 

b.  Par  value  of  shares, 

c.  Rate  of  dividend, 

d.  Voting  power, 

e.  Whether  full  or  partially  paid, 

f.  If  personal  liability  attaches  to  owner- 

ship; 

6.  If  Preferred  Stock  is  authorized — 
a.     Preference  as  to  dividends, 

*  Taken  from  By-Laws. 

282 


APPENDIX.  283 

b.  Preference  as  to  distribution  of  Assets, 

c.  Whether  cumulative  or  non-cumulative, 

d.  Voting  power; 

7.  Amount  of  bonded  indebtedness  authorized — 

a.  Amount  issued, 

b.  Date  of  Maturity, 

c.  Rate  of  interest,  and  when  payable, 

d.  Denomination  of  Bonds  and  serial  num- 

bers, 

e.  Privilege  of  registration, 

f .  Name  and  Location  of  Registrar, 

g.  Name  and  Location  of  Trustee ; 

8.  Amount  of  other  indebtedness  or  liability  for 

leases,  guarantees,  rentals,  etc.; 

9.  Location  of  Principal  Office; 

10.  Name  and  Location  of  Transfer  Agent ; 

11.  Name  and  Location  of  Registrar ; 

12.  Names  of  Officers  and  Directors ; 

13.  Location  and  description  of  property  and 

equipment ; 

14.  Dates  and  duration  of  charter,  franchises, 

etc.; 

15.  If  a  consolidation  of  several  previously  exist- 

ing firms  or  corporations — 

a.  Names  and  descriptions  of  constituent 

companies, 

b.  Whether  owned  or  controlled  in  fee  or 

otherwise. 


284  APPENDIX. 

**An  application  to  list  securities  must  be 
accompanied  by  a  check  for  $100,  drawn  to  the 
order  of  the  Treasurer  of  the  Chicago  Stock 
Exchange,  for  each  class  of  securities  to  be 
listed.?' 

*^A  corporation  is  required  to  maintain  in  the 
City  of  Chicago  a  Transfer  Agency  and  Registry 
for  its  stock.  The  Company  may,  if  it  so  elects, 
transfer  its  own  stock ;  but  the  Registrar  must  be 
a  responsible  Bank  or  Trust  Company  or  other 
agency  satisfactory  to  the  Stock  List  Committee. ' ' 

**An  application  to  list  securities  must  be 
accompanied  by  certified  copies  of:'* 

a.  Articles  of  Incorporation,  or  Charter; 

b.  Trust  Deeds  of  all  bond  issues ; 

c.  Balance  Sheet  and  Income  Account  of  recent 

date; 
(These  may  be  certified  by  the  auditor  of  the 
company  or  by  a  recognized  Chartered  Account- 
ant.) 

d.  An  agreement  in  effect  as  follows : 

*  *  In  making  this  application  it  is  hereby  agreed 
as  a  condition  precedent  to  the  listing  of  the 
securities,  that  the  Company  shall  furnish  to  this 
Committee  at  any  time,  on  demand,  such  reason- 
able information  of  its  general  condition  as  may 
be  required,  and  that  a  failure  to  give  such  infor- 
mation shall  subject  the  Company  to  the  penalty 


APPENDIX.  285 

of  having  its  securities  struck  from  the  list. 
Notice  of  any  increase  of  bonds  or  stock,  stating 
the  purpose  for  which  such  new  bonds  or  stock 
are  issued,  shall  be  given  in  writing  to  the  Secre- 
tary of  the  Stock  Exchange  at  least  thirty  days 
before  the  issuing  of  said  new  bonds  or  stock. 
Notice  shall  be  given  to  the  Secretary  of  the  Stock 
Exchange  in  writing,  at  least  ten  days  in  advance 
of  the  closing  of  the  Transfer  Books,  for  any  pur- 
pose whatsoever.'* 

**No  application  to  list  bonds  or  stock  where 
the  total  issue  amounts  to  less  than  $200,000  par 
value  will  be  considered  by  the  Committee. ' ' 


SYNOPSIS  OF  THE  CORPORATION  LAWS 

of  the  States  of 

Delaware,  Maine  and  Vieginia. 

[Revised — for  Fourth  Edition — ^by  William  R. 
Watson,  Esq.,  Chicago  Manager  of  The  Cor- 
poration Trust  Company.] 

Delaware. 

Business  corporations  are  organized  under  the 
General  Corporation  Law  for  the  transaction  of 
any  lawful  business,  or  to  promote  or  conduct  any 
legitimate  object  or  purpose  other  than  banking. 
They  are  given  the  following  special  powers; 

To  hold,  purchase,  or  convey  real  estate  and 
personal  property ;  to  purchase,  hold,  sell,  assign, 
pledge,  guarantee,  etc.,  stocks  and  bonds  of  other 
corporations,  and  generally  to  do  and  perform  any 
lawful  act  usually  incident  to  such  corporate 
bodies. 

They  may  be  formed  by  three  or  more  persons, 
who  need  not  be  residents  of  the  State  of  Dela- 
ware, and  the  certificate  of  incorporation  may 
contain  any  provisions  desirable  for  regulating 

286 


APPENDIX.  287 

the  business  or  defining  the  powers  of  the  com- 
pany or  its  directors  and  stockholders. 

Under  proper  provision  of  the  certificate  of  in- 
corporation, business  corporations  may  conduct 
business  in  other  states  or  foreign  countries,  and 
have  offices  outside  of  the  State  of  Delaware ;  but 
they  must  maintain  their  ** principal  office''  and 
an  agent  in  charge  thereof  within  the  state. 

The  name  of  a  corporation  must  contain  one 
of  the  words  *  *  association '  V  *  company ' ',  *  *  corpo- 
ration", **club'',  **  incorporated'*,  **  society", 
** union",  or  ** syndicate ". 

Corporate  existence  may  be  made  perpetual  if 
so  provided  in  the  certificate  of  incorporation. 

The  statute  provides  that  the  amount  of  the 
total  authorized  capital  stock  of  the  corporation 
shall  not  be  less  than  $2,000,  and  that  the  amount 
of  capital  stock  with  which  a  corporation  shall 
commence  business  shall  not  be  less  than  $1,000. 
There  is  no  requirement,  however,  that  this  $1,000 
be  paid  up  at  the  time  of  organization. 

Subscriptions  to  or  purchases  of  the  capital 
stock  of  any  corporation  organized  or  to  be  or- 
ganized may  be  paid  for  wholly  or  partly  by  cash, 
by  labor  done,  by  personal  property  or  by  real 
estate  or  leases  thereof;  and  in  the  absence  of 
actual  fraud  in  the  transaction  the  judgment  of 
the  directors  as  to  the  value  of  such  labor,  prop- 
erty, real  estate  or  leases  shall  be  conclusive. 


288  APPENDIX. 

Every  corporation  has  power  to  create  two  or 
more  kinds  of  stock  of  such  classes,  with  such 
designations,  preferences,  voting  power  or  restric- 
tions or  qualifications  thereof  as  shall  be  stated 
in  the  certificate  of  incorporation. 

Preferred  stock  may  be  cumulative  or  non- 
cumulative  and  subject  to  redemption  at  a  fixed 
time  and  place  at  not  less  than  par.  If  preferred 
as  to  dividends,  the  rate  must  not  exceed  eight 
per  centum  per  annum,  before  any  dividend  is  set 
apart  or  paid  to  the  common  stockholders.  In  no 
event  is  a  holder  of  preferred  stock  personally 
liable  for  the  debts  of  the  corporation.  Pre- 
ferred stock  may  be  created  which  has  no  voting 
power.  At  no  time  shall  the  total  amount  of  pre- 
ferred stock  exceed  two-thirds  of  the  actual  capi- 
tal paid  in  cash  or  property.  Preferred  stock 
may  be  converted  into  common  stock  by  so  pro- 
viding in  the  certificate  of  incorporation. 

Stockholders  may  vote  by  proxy. 

The  by-laws  of  a  Delaware  corporation  are  for 
the  government  and  regulation  of  the  members  of 
the  corporation  and  are  not  binding  upon  third 
persons  without  notice.  The  power  to  make  and 
alter  by-laws,  which  rests,  by  statute,  with  the 
stockholders,  may  by  provision  in  the  certificate 
of  incorporation,  be  conferred  upon  the  directors ; 
but  by-laws  made  by  the  latter  may  be  altered  or 
repealed  by  the  stockholders. 


APPENDIX.  289 

Every  corporation  must  have  at  least  three  di- 
rectors, one  of  whom  must  be  a  resident  of  the 
State  of  Delaware.  The  president  must  be  a  di- 
rector. The  secretary  and  treasurer  need  not 
be  stockholders  or  directors.  The  president,  sec- 
retary and  treasurer  may  be  chosen  by  the  stock- 
holders or  the  directors,  as  the  by-laws  may  pro- 
vide. Directors  must  each  be  the  owner  of  at 
least  three  shares  of  stock. 

Directors  are  elected  for  one  year  and  hold 
office  until  their  successors  are  chosen  and  qualify. 
However,  if  it  be  so  provided  in  the  certificate  of 
incorporation  or  any  amendment  thereof  or  by  a 
vote  of  the  stockholders,  one,  two  or  three  classes 
of  directors  may  be  created;  the  term  of  office  of 
those  of  the  first  class  to  expire  at  the  annual 
meeting  next  ensuing;  of  the  second  class  one 
year  thereafter;  and  of  the  third  class  two  years 
thereafter ;  and  at  each  annual  election  held  after 
such  classification  and  election,  directors  shall  be- 
chosen  for  the  full  term  as  the  case  may  be  to 
succeed  those  whose  terms  expire. 

The  Board  of  Directors  may,  by  resolution 
passed  by  a  majority  of  the  whole  board,  desig- 
nate two  or  more  of  their  number  to  constitute  an 
Executive  Committee,  who,  to  the  extent  pro- 
vided in  said  resolution  or  in  the  by-laws  of  said 
company,  shall  have  and  exercise  the  powers  of 
the  Board  of  Directors  in  the  management  of  the 


290  APPENDIX. 

business  and  affairs  of  tlie  company,  and  may 
have  power  to  authorize  the  seal  of  the  company 
to  be  affixed  to  all  papers  which  may  require  it. 

The  original  or  duplicate  of  the  Stock  Ledger 
is  required  to  be  kept  at  the  principal  office  in 
the  State  of  Delaware,  but  other  books  may  be 
kept  outside  of  the  state. 

Meetings  of  the  stockholders  may  be  held  out- 
side of  the  State  of  Delaware,  if  the  by-laws  so 
provide,  otherwise  such  meetings  must  be  held 
at  the  principal  office  of  the  corporation  in  Dela- 
ware. Directors'  meetings  may  be  held  outside 
of  Delaware  if  the  by-laws  so  provide. 

The  Constitution  of  Delaware  exempts  stock  of 
Delaware  corporations  from  taxation  of  any  kind, 
when  held  by  non-resident  individuals  or  corpora- 
tions. 

An  annual  report  is  required  to  be  filed  on  or 
before  the  first  Tuesday  of  January  in  each  year 
with  the  Secretary  of  State,  but  this  report  does 
not  require  the  intimate  financial  details  of  the 
corporation  to  be  disclosed. 

Fees  for  Incorporating. 

Secretary  of  State: 
Ten  cents  for  each  $1,000  of  authorized 
capital  stock  to  $2,000,000,  in  no  case 
less  than  $10.00 


APPENDIX.  291 

Five    cents   per   $1,000   in   excess   of 
$2,000,000. 

Filing  and  indexing  certificate 2 .  00 

Certifying  copy  (each)  about 5.00 

Recorder  of  Deeds : 

Recording  certificate    (determined  by 

length)  average  7 .  00 

Annual  Franchise  Tax. 

All  business  corporations  must  pay  between  the 
third  Tuesday  in  March  and  the  first  of  July  an 
annual  license  tax  based  upon  the  authorized  cap- 
ital stock  on  the  first  of  January  of  each  year,  ex- 
cept certain  special  classes,  such  as  telegraph,  tele- 
I^lione,  electric,  gas,  oil  companies,  etc.,  and  all 
companies  supplying  power  of  any  kind,  which 
must  report  amount  of  business  done  in  Delaware. 
If  such  corporations  operate  exclusively  outside 
the  State  they  pay  no  annual  tax.  The  annual  tax 
is  as  follows : 

Based  on  Authorized  Capital  Stock. 

Not  exceeding  $     25,000 $  5.00 

Not  exceeding       100,000 10.00 

Not  exceeding       300,000 20.00 

Not  exceeding       500,000 25.00 

Not  exceeding    1,000,000 50.00 

Excess  at  the  rate  of  $25  per  million  or  part 
thereof. 


292  appendix. 

Maine. 

Corporations,  except  those  provided  for  by  spe- 
cial acts  concerning  banking  and  kindred  lines  of 
business,  are  organized  pursuant  to  the  provi- 
sions of  chapter  47  of  the  Eevised  Statutes  of 
Maine,  1903,  for  any  lawful  purpose  whatever, 
other  than  to  engage  in  the  liquor  business,  or  to 
conduct  a  banking,  insurance,  railroad,  telegraph, 
telephone,  gas  or  electrical  company.  Railroad, 
gas,  electrical,  telegraph  and  telephone  companies 
may  be  organized  under  the  general  law  if 
they  are  to  operate  entirely  without  the  State 
of  Maine. 

There  are  no  restrictions  as  to  the  holding  of 
real  and  personal  property,  nor  any  limitation 
upon  the  amount  of  debt  which  may  be  created. 
They  may  hold  stock  of  other  corporations  doing 
the  same  or  a  similar  business,  and  may  guarantee 
obligations  of  other  corporations  in  which  they 
are  interested. 

Corporations  may  be  organized  by  three  or 
more  persons.  The  statute  does  not  require 
these  persons  to  be  citizens  or  residents  of  Maine, 
but  inasmuch  as  the  approved  procedure  requires 
the  signers  of  the  Articles  of  Agreement  (which 
is  the  first  instrument  executed  in  the  organiza- 
tion of  a  Maine  corporation)  to  meet  in  person, 
and  in  view  of  the  fact  that  the  statute  requires 


APPENDIX.  293 

all  stockholders*  meetings  to  be  held  within  the 
state,  Maine  corporations  are  invariably  organ- 
ized by  residents  of  the  state,  who  act  for  the  real 
parties  in  interest. 

Corporations  may  conduct  business  in  other 
states  or  foreign  countries,  and  have  oiSices  out- 
side of  the  state,  but  must  maintain  their  **  princi- 
pal office  *  *  and  a  clerk  in  charge  thereof  within  this 
state. 

The  name  of  the  corporation  may  be  in  English 
or  a  foreign  language,  but  must  not  contain  the 
words  **bank'',  *Hrusf ,  **  insurance ' ',  **  rail- 
road'*,  ** savings  bank'*,  or  **safe  deposit*' . 

Corporate  existence  is  regarded  as  perpetual  in 
this  state  although  there  is  no  provision  regulating 
this  feature. 

Corporations  are  permitted  to  purchase  prop- 
erty necessary  for  their  business  **And  issue 
stock  to  the  amount  of  the  value  thereof  in  pay- 
ment therefor,  and  may  likewise  issue  stock  for 
services  rendered  to  such  corporations,  and  the 
stock  so  issued  shall  be  full  paid  stock*'  and  it  is 
provided  that  **In  the  absence  of  actual  fraud  in 
the  transaction  the  judgment  of  the  directors  as 
to  the  value  of  the  property  purchased  or  services 
rendered  shall  be  conclusive  * '. 

The  Supreme  Court  of  Maine  has  repeatedly 
held  that  liability  on  stock  is  applicable  only  to 
parties  taking  directly  from  the  corporation,  and 


294  APPENDIX. 

refuses  to  hold  liable  a  purchaser  from  an  exist- 
ing stockholder  though  the  stock  had  never  been 
fully  paid  for,  and  though  such  purchaser,  with 
knowledge  of  that  fact,  paid  less  than  par.  In 
other  words  liability  does  not  here  travel  with 
stock. 

Stock  may  be  paid  in — in  installments,  and  there 
is  no  minimum  with  which  a  corporation  may 
commence  business,  but  the  authorized  capital 
must  not  be  less  than  $1,000. 

Every  corporation  may  create  two  or  more 
kinds  of  stock,  with  such  classes  and  with  such 
designations,  preferences  and  voting  powers  or 
restrictions  or  qualifications  thereof,  as  shall  be 
fixed  or  determined  in  the  by-laws,  or  by  vote  of 
the  stockholders  at  a  meeting  duly  called  for 
that  purpose.  There  is  no  limitation  on  the  rate 
of  dividends  which  may  be  paid  on  or  set  apart  for 
the  holders  of  preferred  stock,  and  preferred 
stock  dividends  may  be  made  cumulative.  Pre- 
ferred stock  may  be  created  without  voting  power ; 
and  may  be  made  redeemable. 

Every  corporation  must  have  at  least  three 
directors,  none  of  whom  is  required  to  be  a  resi- 
dent of  the  state,  but  they  must  all  be  stock- 
holders. 

The  president,  who  must  be  a  director,  is  in  the 
first  instance  elected  at  the  meeting  of  the  signers 
of  the  Articles  of  Agreement,  and  thereafter  by 


APPENDIX.  295 

the  directors.  The  treasurer  and  clerk,  who  need 
not  be  directors,  are  in  the  first  instance  elected  by 
the  signers,  afterwards  by  the  stockholders 
at  the  annual  meeting,  but  by  so  providing  in 
the  by-laws  the  treasurer  may  be  elected  by 
the  directors. 

By  a  provision  in  the  by-laws  directors  may  be 
divided  into  classes,  and  their  election  may  be  for 
a  longer  term  than  one  year.  Directors  may  also 
act  through  committees  whose  powers  shall  be 
defined  in  the  by-laws.  By-laws  are  adopted  by 
the  stockholders. 

Books  are  required  to  be  kept  at  the  clerk's  of- 
fice in  the  state,  showing  a  true  and  complete  list 
of  all  stockholders,  their  residences,  and  the 
amount  of  stock  held  by  each. 

Stockholders  may  vote  by  proxy  granted  within 
thirty  days  of  the  meeting. 

Stockholders'  meetings  must  be  held  at  the 
principal  ofiice  of  the  corporation  in  the  state. 
Directors'  meetings  may  be  held  outside  of  the 
state  if  the  by-laws  so  provide. 

A  report  signed  and  sworn  to  by  the  president 
or  treasurer  is  required  to  be  filed  with  the  Sec- 
retary of  State  on  or  before  the  first  of  June  annu- 
ally, setting  forth  the  names  and  residences  of  the 
officers  and  directors  of  the  corporation,  the  loca- 
tion of  its  principal  office,  and  the  amount  of  its 
authorized  capital  stock. 


296  appendix. 

Fees  foe  Incokpoeating. 

The  fee  payable  to  the  State  Treasurer,  at  the 
time  of  filing  certificate,  is  based  upon  the  au- 
thorized capital  as  follows : 

$  1,000  to  $  10,000,  inclusive  $10.00 

10,000  to    500,000,  last  inclusive 50.00 

In  excess  of  $500,000,  for  each  $100,000. . .     10.00 

In  addition,  the  official  charges  are: 

Attorney-General,  for  examination $5.00 

Register  of  Deeds,  recording 5.00 

Secretary  of  State,  filing 5.00 

The  annual  franchise  tax  assessed  on  or  before 
the  first  day  of  July,  in  accordance  with  a  return 
filed  on  June  1st,  and  payable  on  the  first  day  of 
September  in  each  year,  is,  like  the  organization 
tax,  based  upon  the  authorized  capital  stock  of  the 
corporation  as  follows : 

$    1,000  to  $     50,000,  inclusive  $  5.00 

50,000  to       200,000,  last  inclusive 10.00 

200,000  to       500,000,  last  inclusive 50.00 

500,000  to    1,000,000,  last  inclusive 75.00 

On  each  million  dollars  or  part  thereof  in 

excess  of  $1,000,000 50.00 

ViEGINIA. 

Business  corporations  are  organized  under  *^  An 
Act  Concerning  Corporations'',  for  the  transac- 


APPENDIX.  297 

tion  of  any  lawful  business,  or  to  promote  or  con- 
duct any  legitimate  object  or  purpose,  except  a 
railroad  company,  a  telegraph  company,  a  tele- 
phone company,  a  canal  company,  a  turnpike  com- 
pany, or  other  company  which  shall  need  to  pos- 
sess the  right  of  eminent  domain,  for  the  purpose 
of  taking  and  condemning  lands  within  this  State ; 
they  are  given  the  following  special  powers: 

To  hold,  purchase  and  convey  such  real  estato 
and  personal  property  as  the  purposes  of  the  cor- 
poration shall  require,  provided  that  the  amount 
of  real  estate  at  which  the  corporation's  holdings 
at  any  time  are  to  be  limited,  shall  be  fixed  and 
stated  in  the  articles  of  association.  If  authorized 
so  to  do  in  the  articles  they  may  subscribe  to, 
purchase  or  otherwise  acquire,  or  guarantee  or 
become  surety  in  respect  to  the  stock,  bonds  or 
other  securities  and  obligations  of  other  com- 
panies, and  to  exercise  all  other  powers  granted  to 
corporations  organized  under  the  Act  and  all 
powers  conferred  upon  corporations  by  the  exist- 
ing laws  of  this  state,  so  far  as  they  are  not  in 
conflict  with  the  Act  and  by  all  acts  hereafter 
passed,  amendatory  thereof  or  supplemental 
thereto. 

They  may  be  formed  by  three  (3)  or  more  per- 
sons who  need  not  be  residents  of  the  Common- 
wealth of  Virginia,  and  the  articles  of  association 
may  contain  any  provision  which  the  incorpora- 


298  APPENDIX. 

tors  may  choose  to  insert  for  the  regulation  of 
the  business  and  for  the  conduct  of  the  affairs  of 
the  corporation;  and  any  provision  creating,  de- 
fining, limiting  or  regulating  the  powers  of  the 
corporation,  of  the  directors  or  of  the  stockhold- 
ers, or  of  any  class  or  classes  of  stockholders; 
provided  such  provision  be  not  inconsistent  with 
the  Act. 

The  Act  provides  that  any  corporation  may 
conduct  its  business  in  this  State,  in  other  States, 
in  the  District  of  Columbia,  in  the  Territories 
and  Colonies  of  the  United  States  and  in  for- 
eign countries;  may  have  offices  without  this 
State  as  well  as  within,  provided  that  its  principal 
office  shall  be  in  this  State ;  and  if  no  officers  or 
directors  are  residents  of  the  city  or  county  in 
which  the  principal  office  is  located,  a  resident 
practicing  attorney  must  be  appointed  as  agent 
for  service  of  process. 

The  name  of  a  corporation  must  contain  the 
word  *  *  Corporation '  *  or  the  word  *  ^  incorporated. '  ^ 

Corporate  existence  may  be  perpetual  if  so  pro- 
vided in  the  articles  of  association. 

There  is  no  limit  as  to  the  amount  of  capital 
stock,  but  the  maximum  and  minimum  amount  of 
capital  stock  must  be  set  forth  in  the  articles  of 
association.  The  incorporators  have  charge 
of  affairs  of  the  corporation  until  such  amount  of 
stock  as  the  incorporators  may  determine — not 


APPENDIX.  299 

less  than  the  minimum  fixed  by  the  articles — is 
subscribed,  and  such  terms  in  respect  thereto  as 
they,  in  the  contract  of  subscription,  may  impose, 
are  complied  with. 

Subscriptions  to  the  capital  stock  may  be  paid 
in  money,  land  or  other  property,  real  or  per- 
sonal, leases,  options,  mines,  minerals,  mineral 
rights,  patent  rights,  rights  of  way,  or  other 
rights,  easements,  contracts,  labor  or  services  and 
there  shall  be  no  individual  or  personal  liability 
on  any  subscriber  beyond  the  obligation  to  comply 
with  such  terms  as  he  may  have  agreed  to  in  his 
contract  of  subscription ;  and  any  corporation  may 
adopt  such  plan  of  financial  organization  and 
may  dispose  of  its  stock  or  bonds  for  the  purposes 
of  its  incorporation  at  such  prices,  for  such  con- 
sideration, and  on  such  terms  and  conditions  as 
it  sees  fit ;  provided,  however,  that  before  making 
an  issue  of  its  stock  or  bonds  it  shall  file  with  the 
State  Corporation  Commission  a  statement  (veri- 
fied by  oath  of  the  president  or  secretary  of  the 
corporation,  and  in  such  form  as  may  be  pre- 
scribed or  permitted  by  the  Commission),  setting 
forth  fully  and  accurately  the  basis  or  financial 
plan  upon  which  such  stock  and  bonds  are  to  be 
issued;  and  where  such  basis  or  plan  includes 
services  or  property  (other  than  money)  received 
or  to  be  received  by  the  corporation,  such  state- 
ment shall  accurately  specify  and  describe  in  the 


300  APPENDIX. 

manner  prescribed  or  permitted  by  the  Commis- 
sion the  services  and  property,  together  with  the 
valuation  at  which  the  same  are  received,  or  to 
be  received,  and  the  judgment  of  the  directors  as 
to  the  value  of  such  land  or  other  property,  real 
or  personal,  leases,  options,  mines,  mineral  rights, 
patent  rights,  rights  of  way,  or  other  rights  of 
easements,  contracts,  labor  or  services,  in  the  ab- 
sence of  fraud,  participated  in  by  both  parties 
to  the  transaction,  shall  be  conclusive. 

Every  corporation  shall  have  power  to  create 
two  or  more  kinds  of  stock,  of  such  classes,  with 
such  designations,  preferences  and  voting  powers, 
or  restrictions  or  qualifications  thereof,  as  shall 
be  stated  and  expressed  in  the  articles  of  associa- 
tion. 

Preferred  stock  may  be  made  subject  to  re- 
demption at  any  time  after  three  (3)  years  from 
the  issue  thereof,  at  not  less  than  par,  and  it  may 
be  provided  that  the  holders  thereof  shall  be  en- 
titled to  receive  dividends  hereon  at  such  rates  and 
on  such  conditions  as  shall  be  stated  in  the  ar- 
ticles, and  such  dividends  may  be  made  payable 
before  any  dividend  shall  be  set  apart  or  paid  on 
the  common  stock  and  may  be  made  cumulative. 
Preferred  stock  may  be  created  with  no  voting 
powers. 

Stockholders  may  vote  by  proxy. 

The  power  of  making  and  altering  by-laws  shall 


APPENDIX.  301 

be  in  the  stockholders ;  but  any  corporation  may 
in  the  articles  of  association  or  by  resolution  of 
its  stockholders,  confer  that  power  upon  the  di- 
rectors. By-laws  made  by  directors  under  power 
or  conferred  may  be  altered  or  repealed  by  the 
stockholders. 

Every  corporation  must  have  at  least  three  di- 
rectors, as  may  be  prescribed  by  the  articles  of  as- 
sociation or  the  by-laws.  They  are  elected  for  the 
term  fixed  by  the  articles  or  by-laws  and  until 
their  successors  are  respectively  elected  and 
qualified.  The  statute  does  not  require  a  director 
to  be  a  stockholder  and  none  of  the  directors  need 
be  residents  of  Virginia.  The  president  must  be 
a  director,  and  unless  otherwise  provided  by  the 
by-laws  of  the  corporation,  he  shall  be  elected  by 
the  stockholders.  The  secretary  and  treasurer 
need  not  be  stockholders  or  directors. 

By  so  providing  in  its  articles  any  corporation 
may  classify  its  directors  in  respect  to  the  time 
for  which  they  shall  severally  hold  ofiice,  the  sev- 
eral classes  to  be  elected  for  different  terms ;  pro- 
vided that  no  class  shall  be  elected  for  a  shorter 
period  than  one  year,  and  that  the  term  of  office  of 
at  least  one  class  shall  expire  in  each  year.  Any 
corporation  which  shall  have  more  than  one  kind 
of  stock  may,  by  so  providing  in  its  charter,  cer- 
tificate of  incorporation,  or  articles  of  association, 
or  in  an  amendment,  confer  the  right  to  choose 


302  APPENDIX. 

the  directors  of  any  class  upon  stockholders  of 
any  class  or  classes,  to  the  exclusion  of  others. 

The  board  of  directors  may,  if  authorized  by 
the  stockholders,  or  by  the  by-laws,  by  a  resolu- 
tion passed  by  a  majority  of  the  whole  board, 
designate  two  or  more  of  their  number  to  consti- 
tute an  executive  committee  who,  to  the  extent 
provided  in  said  resolution  or  in  the  by-laws  of 
said  corporation,  shall  have  and  exercise  the  power 
of  the  board  of  directors  in  the  management  of 
the  business  and  affairs  of  the  corporation,  and 
may  have  power  to  authorize  the  seal  of  the  com- 
pany to  be  affixed  to  all  papers  which  may  require 
it. 

There  is  no  statutory  requirement  as  to  keeping 
any  books  of  the  corporation  in  the  state  when  all 
of  the  business  is  transacted  without  the  state. 

The  power  to  borrow  money  is  not  limited  in 
any  way. 

All  meetings  of  the  stockholders  shall  be  held 
at  such  place  in  the  State  of  Virginia  as  may  from 
time  to  time  be  fixed  by  the  board  of  directors.  Di- 
rectors'  meetings  may  be  held  either  within  or 
without  this  State. 

An  annual  statement  is  required  to  be  filed 
within  thirty  (30)  days  after  the  time  appointed 
for  the  holding  of  the  annual  election  of  directors. 
This  statement  is  filed  with  the  Corporation  Com- 
mission and  must  contain  the  name  and  location 


APPENDIX.  303 

of  the  corporation,  the  name  and  postoffice  ad- 
dress of  the  agent  upon  whom  process  against  the 
corporation  may  be  served,  character  of  business 
transacted,  maximum  capital  stock  authorized, 
amount  of  stock  actually  issued,  amount  of  stock 
actually  outstanding,  date  of  last  annual  meeting 
of  stockholders,  date  of  last  election  of  directors, 
names  and  addresses  of  officers  and  directors  and 
date  when  their  respective  terms  of  office  expire, 
and  the  date  appointed  for  the  next  annual  meet- 
ing of  stockholders.  This  report  is  signed  by  the 
president  and  secretary. 

An  annual  report  is  required  to  be  filed  after 
each  annual  meeting  of  stockholders,  with  the 
clerk  of  the  Circuit  Court  of  the  county  in  which 
the  principal  office  is  located,  or  clerk  of  the  cor- 
poration or  Chancery  Court,  if  such  principal  of- 
fice is  located  in  a  City.  This  report  merely  re- 
quires the  name  of  the  corporation  to  be  given,  a 
list  of  the  officers  and  directors  and  the  date  ap- 
pointed for  the  next  annual  meeting  of  the  stock- 
holders, and  is  signed  by  the  president  and  secre- 
tary. 

Fees  for  Incoeporating. 

State  Treasurer : 

Twenty  cents  on  each  $1,000  of  au- 
thorized capital  stock,  but  not  less 
than  $10  on  $50,000  or  less  of  capi- 


304  APPENDIX. 

tal  stock,  nor  more  than  $600  on 
$3,000,000  or  more  of  capital  stock. 
Fee  to  State  Corporation  Commission: 

Affixing    seal,    entering,    issuing    and 

certifying  charter  $5. 00 

Fees  to  Secretary  of  State: 

Eecording  charter  ($3  for  first  two 
pages,  and  50c  for  each  additional 
page) ,  about 8 . 00 

Certifying  copy,  about  10.00 

Fees  to  Clerk  of  Chancery  Court : 

Eecording  charter  ($3  for  first  two 
pages,  and  50c  for  each  additional 
page) ,  about 8 . 00 

Eecording  power  of  attorney  of  regis- 
tered agent 1 .  25 

Annual  Fbanchise  Tax. 

Annual  Franchise  Tax  on  Maximum  Capital  stock 

of— $25,000,  or  under $  10.00 

Over  $  25,000  and  not  exceeding  $  50,000  20.00 
Over  50,000  and  not  exceeding  100,000  40.00 
Over  100,000  and  not  exceeding  300,000  60.00 
Over  300,000  and  not  exceeding  500,000  100.00 
Over  500,000  and  not  exceeding  1,000,000  200.00 
Over  $1,000,000,  $10  for  each  $100,000  of  excess, 
or  fraction  thereof.  Payable  on  or  before  March 
1st. 


appendix.  305 

Annual  Eegistration  Fee. 

Annual  Registration  Fee  on  Maximum  Capital 
stock  of 

$15,000  or  under $  5.00 

Over  $  15,000  to  $  50,000 10.00 

Over     50,000  to    100,000 15.00 

Over    100,000  to    300,000 20.00 

Over  $300,000 25.00 

Payable  on  or  before  March  1st. 

Note:  As  the  corporation  laws  of  the  various 
states  are  constantly  undergoing  changes,  it  will 
be  necessary  to  refer  to  the  laws  in  force  at  the 
time  of  inquiry,  in  order  that  accurate  information 
may  be  obtained. 

The  Author. 


Foreign  Corporations. 

**An  Act  entitled  ^An  act  to  regulate  the  ad- 
mission of  foreign  corporations  for  profit,  to  do 
business  in  the  State  of  Illinois.'  (Approved  May 
18,  1905;  in  force  July  1,  1905,  as  amended  in 
1911.) 

*^  Section  1.  Be  it  enacted  by  the  People  of 
the  State  of  Illinois  represented  in  the  General 
Assembly:  That  before  any  foreign  corporation 
for  profit  shall  be  permitted  or  allowed  to  tran- 
sact any  business  or  exercise  any  of  its  corpo- 
rate powers  in  the  State  of  Illinois,  other  than 
insurance  companies,  building  and  loan  com- 
panies and  surety  companies,  they  shall  be  re- 
quired to  comply  with  the  provisions  of  this  act 
and  shall  be  subject  to  all  of  the  regulations  pre- 
scribed herein,  as  well  as  all  other  regulations, 
limitations  and  restrictions  applying  to  corpora- 
tions of  like  character  organized  under  the  laws 
of  this  state.'* 

**Sec.  2.  When  any  corporation  organized  un- 
der the  laws  of  any  foreign  state  or  country,  for 
the  transaction  of  business  for  profit,  desires  ad- 
mission into  the  State  of  Illinois,  for  the  purpose 

306 


APPENDIX.  307 

of  transacting  business  or  exercising  its  corpo- 
rate powers  or  franchise  it  shall  make  applica- 
tion to  the  Secretary  of  State,  signed  and  sworn 
to  by  the  president  and  secretary,  stating  what 
business  such  corporation  proposes  to  pursue  un- 
der its  charter,  the  amount  of  capital  stock  of  such 
corporation,  whether  it  is  transacting  or  it  is  in- 
tended that  it  shall  transact  business  in  any  other 
state  or  country,  the  proportion  of  its  business 
intended  to  be  carried  on  in  the  State  of  Illinois, 
the  amount  paid  in  upon  its  capital  stock,  what 
property  and  assets  and  an  estimate  of  the  value 
thereof  will  be  employed  in  the  business  of  said 
corporation  in  the  State  of  Illinois ;  if  any  of  its 
capital  subscribed  has  not  been  paid  in  what  dis- 
position is  to  be  made  thereof,  the  names  of  the 
president,  secretary  and  directors  of  said  corpora- 
tion and  their  residences,  where  its  principal  of- 
fice in  Illinois  will  be  located  and  the  name  and 
address  of  some  attorney  in  fact,  upon  whom 
service  can  be  had  in  all  suits  commenced  in  this 
state  and,  if  required  by  the  Secretary  of  State, 
the  names  and  residences  of  all  stockholders  in 
said  corporation  as  shown  by  its  records,  and  such 
corporation  shall  file  with  the  Secretary  of  State, 
copy  of  its  charter  or  articles  of  incorporation,  or 
in  case  such  corporation  is  incorporated  merely 
by  a  certificate  then  a  copy  of  its  certificate  of  in- 
corporation duly  certified  and  authenticated  by 


308  APPENDIX. 

the  officer  who  issued  the  original,  or  by  the  re- 
corder or  registrar  of  the  office  in  which  said 
original  charter,  articles  or  certificates  may  have 
been  recorded.*' 

**The  Secretary  of  State  shall  have  power  to 
prescribe  the  form  of  such  application  and  may, 
in  addition  thereto,  propound  such  interrogatory 
or  interrogatories  to  the  applicants  respecting  the 
character  of  the  business  in  which  said  corpora- 
tion proposes  to  engage,  the  amount  of  its  capital 
stock,  the  proportion  of  its  business  that  it  is  in- 
tended shall  be  carried  on  in  this  state,  and  the 
proportion  and  location  of  its  business  in  other 
states  or  countries,  and  such  interrogatories  shall 
be  answered  under  oath  and  the  interrogatories 
and  answers  thereto  shall  be  filed  with  said  appli- 
cation and  with  the  certified  copy  of  its  charter 
and  shall  be  and  operate  as  a  limitation  upon  the 
powers  of  said  corporation  to  transact  business 
in  the  State  of  Illinois.'' 

*  *  The  Secretary  of  State,  upon  the  admission  of 
such  foreign  corporation  to  do  business  in  the 
State  of  Illinois,  shall  issue  a  certified  copy  of  all 
papers,  including  certified  copy  of  the  charter  of 
said  corporation,  and  shall  state,  in  a  certificate 
of  authority  to  do  business  issued  by  him,  the 
powers  and  object  of  said  corporation  which  may 
be  exercised  in  this  state,  not  in  conflict  with  the 
law  or  public  policy  of  this  state,  and  no  corpora- 


APPENDIX.  309 

tion  shall,  by  the  certificate  of  the  Secretary  of 
State,  be  authorized  to  transact  any  business  in 
this  state  for  the  transaction  of  which  a  corpora- 
tion cannot  be  organized  under  the  laws  of  this 
state,  and  no  foreign  corporation  shall  exercise 
any  powers  in  this  state  not  authorized  by  the  pro- 
visions of  its  charter.'* 

**Sec.  3.  Every  foreign  corporation  admitted 
to  do  business  in  the  State  of  Illinois  under  the 
provisions  of  this  act  shall  constantly  keep  on  file 
in  the  office  of  the  Secretary  of  State  an  affidavit 
of  the  president  and  secretary,  showing  the  loca- 
tion of  its  principal  business  office  in  the  State  of 
Illinois,  and  the  name  and  address  of  some  person 
who  may  be  found  in  this  State,  for  the  purpose 
of  accepting  service  upon  said  corporation,  in  all 
suits  that  may  be  commenced  against  it,  and  as 
often  as  said  corporation  shall  change  the  loca- 
tion of  its  office,  or  its  attorney  for  receiving  and 
accepting  service,  a  new  affidavit  shall  be  filed  to 
take  the  place  of  all  such  affidavits  previously  filed 
by  the  officers  of  said  corporation.  Such  corpora- 
tion when  admitted  to  do  business  in  the  State  of 
Illinois,  under  this  act  shall  be  required  to  make 
such  reports  from  time  to  time,  as  are  required  to 
be  made  by  similar  corporations  organized  under 
the  laws  of  this  state  and  all  regulations  now  in 
force  or  hereafter  imposed  upon  domestic  corpo- 
rations, shall  be  alike  observed  and  complied  with 


310  APPENDIX. 

by  all  foreign  corporations  doing  business  in  this 
state." 

*^No  foreign  corporation  admitted  to  do  busi- 
ness in  this  state  under  the  provisions  of  this  act 
shall  hold  any  real  estate  except  such  as  may  be 
necessary  for  the  proper  carrying  on  of  its  legiti- 
mate business,  nor  be  permitted  to  mortgage, 
pledge  or  encumber  its  real  or  personal  property 
situated  in  this  state  to  the  injury  or  exclusion  of 
any  citizen  or  corporation  of  this  state  who  is 
creditor  of  such  foreign  corporation  and  no  mort- 
gage by  any  foreign  corporation,  except  railroad 
and  telegraph  companies,  given  to  secure  any  debt 
created  in  any  other  state  shall  take  effect  as 
against  any  citizen  or  corporation  of  this  state 
until  all  of  its  liabilities  due  any  person  or  cor- 
poration of  this  state  at  the  time  of  recording 
such  mortgage,  shall  have  been  fully  paid  and  ex- 
tinguished. Before  any  foreign  corporation  shall 
be  authorized  to  do  business  in  this  state  it  shall 
be  required  to  pay  into  the  office  of  the  Secretary 
of  State  upon  the  proportion  of  its  stock  repre- 
sented by  its  property  and  business  in  Illinois, 
fees  equal  to  those  required  of  similar  corpora- 
tions formed  within  and  under  the  laws  of  this 
state.'' 

*  *  *  '*Sec.  5.  At  any  time  the  Secretary 
of  State  may,  in  his  discretion,  prepare  and  pro- 
pound to  the  president,  secretary,  any  director 


APPENDIX.  311 

or  manager  of  any  corporation  doing  business  in 
this  state  under  the  provisions  of  this  act,  such 
interrogatories  respecting  the  character  of  busi- 
ness being  transacted  by  it,  the  location  of  its 
business,  the  names  and  residences  of  its  direc- 
tors and  officers,  and  the  amount  of  capital  paid 
in,  as  well  as  what  disposition  has  been  made  of 
capital  stock  subscribed  for  or  authorized  and 
not  paid  in,  and  such  interrogatories  shall  be 
answered  under  oath  by  the  officer  or  director  to 
whom  propounded,  within  five  days  after  receipt 
thereof,  and  upon  the  failure  or  refusal  of  such 
officer  or  director  to  fully  answer  such  interroga- 
tories and  file  the  same,  with  his  answers,  in  the 
office  of  the  Secretary  of  State,  within  ten  days 
after  receiving  the  same,  the  Secretary  of  State 
may  revoke  the  authority  of  such  corporation  to 
do  business  in  this  state,  by  filing  with  the  certi- 
fied copy  of  the  charter  of  such  corporation  a 
certificate  of  revocation,  and  by  the  publication 
thereof  for  one  issue  in  some  newspaper  of  gen- 
eral circulation  in  the  State  of  Illinois,  and  there- 
after such  corporation  shall  not  exercise  any  of 
its  corporate  powers  or  franchises  in  the  State  of 
Illinois.  When  such  interrogatories  shall  have 
been  answered  and  filed  with  the  answers  thereto, 
in  the  office  of  the  Secretary  of  State,  if  thereby 
any  violation  of  the  law,  or  of  the  charter  of  said 
corporation,  or  any  excess  of  its  powers  and 


312  APPENDIX. 

authority  to  do  business  in  this  state  is  disclosed, 
a  copy  thereof,  with  such  information,  shall  be 
immediately  transmitted  to  the  Attorney  General 
of  this  state  for  his  action.'' 

*^Sec.  6.  Every  foreign  corporation  amenable 
to  the  provisions  of  this  act,  which  shall  neglect 
or  fail  to  comply  with  any  of  the  provisions  of 
the  same  as  herein  provided,  shall  be  subject  to  a 
penalty  of  not  less  than  one  thousand  dollars 
($1,000)  nor  exceeding  ten  thousand  dollars 
($10,000),  to  be  recovered  before  any  court  of 
competent  jurisdiction,  and  it  is  hereby  made  the 
duty  of  the  Secretary  of  State,  as  he  may  be  ad- 
vised, or  may  ascertain  that  any  corporation  is 
doing  business  in  contravention  of  this  act,  to 
report  such  fact  to  the  Attorney  General  of  this 
state,  and  it  shall  be  his  duty  and  the  duty  of  the 
state's  attorney  of  the  proper  county  to  bring 
such  actions  at  law  as  shall  be  necessary  for  the 
recovery  of  the  penalties  imposed  hereby,  and  in 
addition  to  such  penalty,  if  after  this  act  shall 
take  effect  any  foreign  corporation  shall  fail  to 
comply  herewith,  no  suit  may  be  maintained  either 
at  law  or  in  equity  upon  any  claim,  legal  or  equit- 
able, whether  arising  out  of  contract  or  tort  in 
any  court  in  this  state." 


appendix. 
Earnings  on  Stocks  and  Bonds. 


313 


This  table  gives  the  approximate  earnings  on 
Stocks  and  Bonds.  As  an  illustration,  a  5%  stock 
or  bond  selling  at  90,  yields  5.56%.  By  looking 
down  the  5%  column  to  90  this  will  be  shown, 


Price 

1% 

2% 

3% 

4% 

6% 

6% 

7% 

8% 

0% 

10% 

12% 

.10 

10% 

20% 

30% 

40% 

60% 

60% 

70% 

80% 

90% 

100% 

120% 

12% 

8. 

16. 

24. 

32, 

40. 

48. 

56. 

64. 

72. 

80, 

96. 

16 '^ 

6.67 

13.33 

20. 

26.67 

33.33 

40. 

46,67 

53,33 

60, 

66.67 

80. 

17% 

6.71 

11.43 

17.14 

22,86 

28.57 

34.28 

40. 

45.71 

51.43 

57,14 

68.67 

5 

10. 

15. 

20. 

25, 

30. 

35. 

40. 

45. 

50. 

GO. 

22% 

4.44 

8.89 

13.33 

17.78 

22.22 

26.67 

31.11 

35.66 

40. 

44.44 

53.33 

25 

4. 

8. 

12. 

16. 

20. 

24. 

28, 

32. 

36. 

4U. 

48. 

27% 

3.64 

7.27 

10.91 

14.55 

18.18 

21.82 

25.45 

29.09 

32,73 

36.36 
33.33 

42.64 

80 

3.33 

6  67 

10. 

13.33 

16.67 

20. 

23.33 

26.67 

30. 

40, 

82% 

3.08 

6.15 

9.23 

12.31 

15.39 

18.46 

21.64 

24.62 

27.69 

30.77 

.36.92 

85 

2.86 

5.71 

8.57 

11.43 

14.29 

17,14 

20. 

22.86 

25,71 

28.57 

34.29 

87% 

2.67 

5  33 

8. 

10.67 

13.33 

16, 

18.67 

21,33 

24, 

26.67 

32. 

40 

2.5 

0 

7.5 

10. 

12.5 

15. 

17.5 

20, 

22,6 

25. 

30. 

42% 

2.35 

4.70 

7.06 

9.41 

11.70 

14.12 

16.47 

18.82 

21.18 

23.53 

28s  23 

45 

2.22 

4.44 

6.07 

8,89 

11.11 

13.33 

15.56 

17.78 

20, 

22.22 

26.67 

47% 

2.11 

4.21 

6.32 

8,42 

10.53 

12.63 

14,74 

16.84 

18.95 

21.05 

25.26 

60 

2. 

4 

6. 

8, 

10. 

12. 

14. 

16. 

18. 

20. 

24. 

62% 

1.90 

3.81 

5.71 

7.62 

9.52 

11.43 

13.33 

15.24 

17.14 

19.05 

22.86 

65 

1.82 

3.63 

5.45 

7.27 

9.09 

10.91 

12.72 

14.55 

16.36 

18.18 

21,82 

67% 

1.74 

3.48 

5.22 

6.96 

8.70 

10.43 

12.17 

13.91 

15.65 

17.39 

20,87 

60 

1.67 

3.33 

5. 

6.67 

8.33 

10. 

11.67 

13,33 

15. 

16.67 

20, 

«2% 

1.6 

3.2 

4.8 

6.4 

8. 

9.6 

11.2 

12,8 

14.4 

16, 

19.02 

65 

1.54 

3.08 

4.62 

6.15 

7.69 

9.23 

10.77 

12.31 

13.85 

15,38 

18.46 

07% 

1.48 

2.96 

4.44 

5.93 

7  41 

8.89 

10.37 

11.85 

13.33 

14,81 

17.78 

70 

1.43 

2.80 

4.29 

5.71 

7.14 

8.57 

10. 

11.43 

12.86 

14,29 

17.14 

72% 

1.38 

2.70 

4.14 

5.52 

6.90 

8.27 

9.65 

11.03 

12.41 

13,79 

16.55 

75 

1.33 

2.«7 

4. 

5.33 

6.67 

8. 

9.33 

10.67 

12. 

13.33 

18. 

77% 

1.29 

2.58 

3.87 

5.16 

6.45 

7,74 

9.03 

10.32 

11.61 

12.90 

15,48 

80 

1.25 

2.5 

3.75 

5. 

6.25 

7.5 

8.75 

10. 

11.25 

12.5 

15. 

82% 

1.21 

2.42 

3.64 

4.85 

6.00 

7.27 

8.48 

9.70 

10.91 

12.12 

14.64 

85 

1.18 

2.3.5 

3.53 

4.71 

5.88 

7.06 

8.24 

9.41 

10.59 

11.76 

14.12 

87% 

1.14 

2.29 

3.43 

4.57 

5.71 

6. 80 

8. 

9.14 

10,29 

11.43 

13.71 

90 

1.11 

2.22 

3.33 

4.44 

5.56 

6.67 

7.78 

8.89 

10, 

11.11 

13.33 

92% 

1.68 

2.16 

3.24 

4.32 

5.41 

6.49 

7.57 

8.65 

9.73 

10.81 

12.97 

95 

1.05 

2.11 

3.16 

4.21 

5.26 

6.32 

7.37 

8.42 

9.47 

10.53 

12.63 

97% 

1.03 

2.05 

3.08 

4.10 

5,13 

6.15 

7.18 

8.21 

9.23 

10.26 

12.31 

100 

1 

2. 

3. 

4. 

6, 

6. 

7. 

8, 

9, 

10. 

12, 

105 

.95 

1.90 

2.86 

3.81 

4.76 

5.71 

6.67 

7.62 

8.57 

9.52 

11,43 

110 

.91 

1.82 

2.73 

3.64 

4.55 

5.45 

6.36 

7.27 

8.18 

9.09 

10.91 

115 

.87 

1.74 

2.61 

3.48 

4.35 

5.22 

6.09 

6.96 

7,83 

8,70 

10.43 

120 

.83 

1.67 

2.5 

3.33 

4,17 

6, 

6.83 

6.67 

7,5 

8,33 

10. 

125 

«8 

1.6 

2.4 

3,2 

4. 

4,8 

6.6 

6.4 

7.2 

8. 

9.6 

130 

.77 

1.54 

2.31 

3.08 

3,83 

4.62 

6.38 

6,15 

6.92 

7.69 

9.23 

135 

.74 

1.48 

2.22 

2.96 

3,70 

4.44 

6.19 

6.93 

6.67 

7.41 

8.89 

140 

.71 

1.43 

2.14 

2.86 

3.57 

4.29 

6. 

6.71 

6.43 

7.14 

8.67 

145 

.69 

1.38 

2.07 

2.76 

3.45 

4.14 

4.83 

5.52 

6.21 

6.90 

8.28 

150 

,67 

1 . 3.T 

2. 

2.67 

3.33 

4, 

4.67 

6.33 

6, 

6.67 

8. 

155 

.65 

1.29 

1.04 

2.68 

3.23 

3,87 

4.52 

6.16 

6.81 

6.45 

7.74 

ICO 

.63 

1.25 

1.87 

2.6 

3.12 

3.75 

4.37 

6. 

6,62 

6.25 

7.5 

165 

.61 

1.21 

1.82 

2.42 

3.03 

3.64 

4.24 

4".  85 

6.45 

6.06 

7.27 

170 

.59 

1,18 

1.76 

2.35 

2.94 

3.53 

4.12 

4.71 

6.29 

5.88 

7.06 

175 

.67 

1.14 

1.71 

2.29 

2.86 

3.43 

4, 

4.57 

6.14 

6.71 

6.85 

180 

.5rt 

1.11 

1,67 

2.22 

2.78 

3.33 

3.89 

4.44 

5, 

6.56 

6.67 

185 

.64 

1.08 

1.62 

2.16 

2,70 

3.24 

8.78 

4.32 

4,86 

6.41 

6.49 

190 

.53 

1,05 

1.58 

2,11 

2.63 

3.16 

8.68 

4.21 

4.74 

6.26 

6.32 

195 

.61 

1.03 

1.54 

2.05 

2,66 

3.08 

3.69 

4.10 

4.62 

5,13 

6.15 

200 

.6 

1. 

1.5 

2.5 

3. 

3.5 

4. 

4.5 

5. 

«' 

INDEX 


A 

ACCOUNTS,  Page 

Books  of    110 

Examination   of    115 

How  to  Audit  118 

ADVANTAGES  OF  INCORPORATING  24 

AGREEMENTS, 

Between  Majority  Stockholders   104 

Legality  of   105 

Promoters    159 

To  Incorporate 207,  208 

AMOUNT  OF  CAPITALIZATION    54 

APPENDIX     205 

APPRAISAL  OF  PROPERTY 83,  214 

Illustration    242 

Observations  on    32-214 

APPROVAL  OF  MINUTES  OF  MEETINGS 112 

ASSIGNMENT, 

Of  Commissioners*  Receipt  or  Subscription 247,  249 

Of  Installment  Certificate  250,  252 

Of  Patent 264,  266,  268 

Of  Stock 51 

AUDIT  OF  ACCOUNTS,  ETC 115 

How   to  Accomplish    118 

B 

BONDS  (See  Capital,  Bonda  and  Stocks), 

Convertible  into  Stock   52 

Capital  Obtained  by  Issue  of  51 

Sale  of   62,  71,  79 

BONUS, 

Stock  as  73 

315 


316  INDEX. 

Page 

BOOKS, 

Corporate  Books 110 

Inspection  of 115 

Minute  Book Ill 

BUSINESS  CORPORATIONS  (Subject  of  Discussion), 

Distinguished  from  Mining   188 

BY-LAWS  AND  THEIR  USES 106 

Adoption    108 

Illustration    253 

Observations  on 216 


CAPITAL,  BONDS  AND  STOCKS, 

Defined  and  Distinguished   46 

Observations  on   45 

CAPITALIZATION  OF  CORPORATIONS    54 

Mode   of    59,   60 

Mining  Corporations    191 

Good  Will  as  Basis  174 

CAPITAL, 

Raising  Additional 64 

CAPITAL  STOCK   46 

CERTIFICATE  OF  INCORPORATION, 

.  Filing    28-34 

Observations  on    34 

CERTIFICATE  OF  STOCK, 

Assignment  of 51 

Common    Stock    48 

Negotiability  of   51 

Preferred  Stock    49 

CHARTER  (See  Certificate  of  Incorporation). 

CLASSIFICATION, 

Of  Directors    32,  289,  294 

Of  Stock 288,  294,  300 

COMMON  ERRORS    21 

COMMON  STOCK  (See  Capital,  Bonds  and  Stocks) 45 


INDEX.  317 

Page 

CONSOLIDATION  OF  CORPORATIONS, 

Discussion  on    138 

Illustration  of 229 

CONSOLIDATION  OF  ENTERPRISES   138 

How  Accomplished 229 

CONTRACTS, 

Promotion    159 

Purchasing  Assets  by  212 

CORPORATION,  AND  ITS  ADVANTAGES 24 

CORPORATE  FINANCING  45 

CORPORATE  MANAGEMENT 91 

CORPORATE  RECORDS  AND  BOOKS  OF  ACCOUNT 110 

CORPORATION, 

Defined    ; 24 

How  Organized   27 

Where  to  Organize 37 

Advantages  of    24 

Mining  Corporations    188 

Substitute   for    24 

COUNSEL, 

Necessity  of 14,  201,  206 

Compensation  of 202 

CUMULATIVE  DIVIDENDS, 

Defined    49 

Illustration  of  Provisions 238 

CUMULATIVE  VOTING, 

Explained   105,  106 

D 

DEBTS, 

Directors'  Liability  for 92 

Officers'  Liability  for 96 

Stockholders'  Liability  for 98 

DELAWARE, 

Synopsis  of  Corporation  Laws 286 

DEPRECIATION  (See  Accounting,  Etc.). 

DIRECTORS  AND  OFFICERS— THEIR  DUTIES  AND  LIA- 
BILITIES       91 


318  INDEX. 

Page 

DISSOLUTION  OF  CORPORATION 141 

DIVIDENDS  (See  Capital,  Bonds  and  Stocks) 45 

Cumulative  and  Non- cumulative ■.     49 

How  Secured  to  Preferred  and  Common  Stockholders.  .49-238 

Liability  for  Unlawful  Payment 92 

Table  of  Earnings 313 

DURATION, 

Of  Corporate  Existence 30-31 

In  Delaware 286 

In  Maine    293 

In  Virginia 298 

£ 

EARNINGS, 

Capitalization  Regulated  by 56 

Table   of    313 

Good  Will  Valued  as 175 

ELECTIONS  (See  Delaware,  Maine  and  Virginia), 

Directors  and  Officers 32,  33 

ERRORS,  COMMON   21 

EXAMINATION  OF  BOOKS  AND  RECORDS  115 

How  accomplished    118 

EXCHANGE  OF  PROPERTY  FOR  STOCK, 

Observations  on 31,  80,  99,  155,  175,  191 

Plan  Illustrated  227,  229 

EXPENSES  OF  INCORPORATION, 

In  Delaware 290 

In  Maine   296 

In  Virginia    303 

Observations  on 38,  201 

F 

FEES  FOR  INCORPORATING, 

Delaware    290 

Maine    296 

Virginia    303 

Attorneys'    201 

FINANCING  ENTERPRISES. . .  .22,  45-54,  64,  191,  208,  209,  213 


INDEX.  319 

Page 

FOREIGN  CORPORATIONS, 

Law  Regulating   41 

E.  g.  Illinois 306 

FORMATION  OF  A  CORPORATION, 

How  to  Accomplish   27 

Mining  and  Mineral 191 

FORMS  (See  Illustrations) 205-280 

FULLY  PAID  STOCK  (See  Capital,  Bonds  and  Stocks). 

G 

GOOD  WILL, 

Good  Will — Trademarks  and  Trade  Names 170 

How  Preserved 25,  82,  170 

How  Valued 175 

GUARANTEED  STOCK, 

Discussed    168 

H 
HOW  TO  ORGANIZE  A  CORPORATION 27 

I 

ILLUSTRATIONS  (See  Explanation  of) 205 

Appraisal  of  Property 214,  242 

Assignment  of  Invention 264 

Assignment  of  Patent    268 

Assignment  of  Undivided  Interest  in  Patent 266 

By-Laws 253 

Contracts,  General  and  Special 207,  208,  218,  221 

Commissioners'  Receipt 247 

Escrow  Agreement 201 

Fraudulent  Financing 66,  143 

Installment  Certificate 250 

Offering  Stock  for  Sale   213,  234 

Option  Contract  (Cash  Plan) 270 

Option  Contract   (Stock  Plan) 275 

Proxy  to  Vote 281 

Proposition  to  Corporation 212-229 

Purpose  for  Coal  Company 196 


320  INDEX. 

Page 

Reorganization,  How  Accomplished 229 

Reorganization  Certificate  209,  227 

Resolution,  Ratifying,  Etc 244 

INCREASE  OF  CAPITAL  STOCK, 

When  Advisable 36,  73 

INSPECTION  OF  CORPORATE  BOOKS, 

Stockholders,  Right  to 125 

ISSUANCE   OF   STOCK   FOR   PROPERTY 

31,  80,  99,  155,  175,  191 

L 

LEADING  INCORPORATING  STATES 38 

Synopsis  of  Laws  of 286 

LEGAL  ENTITY— CORPORATION  IS 24,  47 

LIABILITY, 

Of  Directors  and  Officers   91 

Of  Promoter 161 

Of  Stockholders    98 

LIQUIDATION  (See  Dissolution). 

LISTING  OF  STOCKS  AND  BONDS 63 

E.  g.,  Chicago  Stock  Exchange  Rules 282 

LOCATION    74 

M 

MAINE, 

Synopsis  of  Corporation  Laws 292 

MAJORITY  STOCKHOLDERS, 

Rights  of   103 

MEETINGS, 

Records  of    111-117 

To  Organize  Corporation 32,  111 

In  Delaware 290 

In  Maine 292 

In  Virginia    302 

MINING  ENTERPRISES, 

Observations  on    188 

MINORITY  STOCKHOLDERS, 

Rights  of   103 


INDEX.  321 

Page 

MINUTES, 

Amendment  of   113 

Approval  of  112 

Books  of Ill 

MORTGAGE, 

Security  for  Bonds 51,  52 

If 

NAME, 

Preservation  of 25,  82,  170 

Trade  Name 25-170 

NUMBER  OF  DIRECTORS 33 

In  Delaware 289 

In  Maine    294 

In  Virginia 301 

0 

OFFERING  OF  STOCK  FOR  SALE 234 

Observations  on   213 

OFFICE  IN  OTHER  STATES  (See  Foreign  Corporation). 

OFFICERS  (See  By-Laws), 

Liabilities  for  Salaries  Paid,  When,  Etc 91-96 

Necessary 35 

Powers  of 91 

OPTIONS, 

Forms  of 270-275 

Purpose  of  199 

ORGANIZATION  (Subject  of  Discussion). 

OVER-ISSUED  STOCK, 

Defined    48 

OVER-VALUATION  OF  PROPERTY, 

Liability  Therefrom  98,  143 

P 

PAR  VALUE, 

Stock  Should  Be  Issued  for 99.  102 

Non  Par  Value 57 

PARTNERSHIP  (see  Advantages  of  Incorporation). 


322  INDEX. 

Page 

PATENTS  (See  Patents  and  Their  Commercial  Value) 177 

Assignment  of  Invention  Before  Patent 264 

Assignment  of  Undivided  Interest 268 

Assignment  of  Whole,  After  Patent  Issues! 266 

PAYMENT  FOR  STOCK  IN  PROPERTY  (See  Over- Valua- 
tion of  Property). 

PLANS, 

Illustrations 205-280 

Importance  of 15,  45,  70,  201,  205 

POWERS, 

How  Derived 27,  29 

PREFERRED  STOCK, 

Cumulative   49,  238 

Non-cumulative 49-238 

Right  of  Issue  48,  49 

Terms  and  Conditions  of 48,  49 

PROMOTERS, 

Contracts  (See  Promotion  Contracts) 159 

Defined  and  Discussed 153 

Liabilities  of 162 

PROMOTION  CONTRACTS, 

Observations  on   159 

PROMOTION  OF  ENTERPRISES 153 

PROPOSITION  TO  CORPORATION,  ETC 229 

Observations  on    212 

PROSPECTUS, 

Illustration    234 

Observations  on    213 

PROXY, 

Form  of 281 

Right  to  Appoint 105,  125 

PURPOSES  (See  Delaware,  Maine  and  Virginia), 

Observations  on 24,  28 


RAISING  ADDITIONAL  CAPITAL 64 

RATIFICATION, 

Of  Acts  of  Officers,  Etc Ill,  117 


INDEX.  323 

Page 

RECORDING, 

By-Laws    111-117 

Minutes   111-117 

REORGANIZATION, 

Observations  on   129 

REORGANIZATION  CERTIFICATE, 

Explanation   209 

Illustration    227 

REPORTS, 

Annual    96 

Resolution  Ratifying  Commissioners,  Etc 244 

RESOLUTION, 

In  Accepting  Property,  Etc 215 

Ratifying  Acts  of  Commissioners,  Etc 244 

RIGHTS  OF  STOCICHOLDERS, 

Discussion  on 98 

S 

SALARIES, 

Of  Directors  and  Officers 95-96 

SALE, 

Of  Business 26,  82,  131,  208,  221 

Proposition  to  Corporation 212,  229 

SECRET  PROFITS 93,  164 

SHARES   (See  Capital,  Bonds  and  Stocks). 

STOCK  (See  Capital,  Bonds  and  Stocks) 45 

Classification  and  Definitions  of 48 

Listing    63 

STOa^HOLDERS'  RIGHTS  AND  LIABILITIES, 

Discussion  on    98 

STOCK-JOBBING    143 

SUBSCRIBER, 

To  Capital  Stock— Liability  of 31,  98 

Subscription  31,  207 

T 

TABLE, 

Of  Earnings  on  Stocks  and  Bonds 313 


324  INDEX. 


TRADEMARKS    171 

Observations  on 170-177 

TRADE  NAME, 

Value  of   25-29,  82-170 

TRANSFERRING    AN    ESTABLISHED   BUSINESS    TO    A 
CORPORATION 80 

U 

UNDERWRITING, 

Contracts  Relating  to  167 

V 

VALUATION  OF  PROPERTY, 

Abuse  of   81,  99 

A  Safe  Rule  in 81 

Good  Will    175 

Mining  Property  Distinguished 188 

VIRGINIA, 

Synopsis  of  Corporation  Laws  of 296 

VOTING, 

Cumulative   105,  106 

Observations  on   98 

Proxies    105-125 

W 

WATERED  STOCK, 

Defined    48 

WHERE  TO  ORGANIZE, 

Subject  Discussed 37 

Laws  of  Favorite  States 286 


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